Steward loses money on Massachusetts hospital sale; CEO snubs Senate

Steward Health Care received court approval to sell six of its Massachusetts hospitals for a combined $243 million during a contentious hearing Wednesday, effectively ending its operations in the state.

The health system will sell St. Anne’s Hospital and Morton Hospital to Rhode Island-based Lifespan Health System for $175 million; St. Elizabeth’s Medical Center and Good Samaritan Medical Center to Boston Medical Center for $140 million; and both Holy Family Hospital campuses to Lawrence General Hospital for $28 million.

But the sale was far from a win for the bankrupt doctor chain. Details from an incendiary letter written by Steward CEO Ralph de la Torre, first published in the Boston Globe on Wednesday, threatened to overshadow the deal’s closing entirely. The executive said he would not comply with a subpoena to testify before a Senate subcommittee next week.

After adjusting for the purchase price and closing costs, the transactions will leave Steward with a shortfall of about $17 million, according to Candace Arthur, a partner at Weil, Gotshal & Manges, who represented Steward at Wednesday’s sale hearing.

Because Apollo Global Management walked away with almost all of the value. The private equity and asset management firm made about $225 million on the deals, according to asset purchase agreements.

Apollo now owns the mortgages on Stewart’s Massachusetts hospitals, which are owned by Medical Properties Trust and Macquarie Infrastructure Partners. Earlier this summer, the company engaged in lengthy negotiations with Stewart over how to split the proceeds of the sale between hospital operations and real estate.

Arthur told the court that despite the “zero economics” of the deal, the debtors “fully support the sale.”

She noted that the sale would save thousands of jobs and prevent hospital closures. The deals were also supported by the Massachusetts government, which offered Steward a total of $72 million in emergency funding to cover hospital operating costs in August and September.

However, the transactions did not materialize. Steward’s “First in, last out” or FILO lenders — WhiteHawk Finance, Owl Creek Investments, MidOcean Credit Fund Management and Brigade Capital Management — opposed Steward’s sale of the hospitals at a loss.

The lenders are also acting as debtor-in-possession financiers for the health care system, offering Steward funds for the restructuring. The lenders have provided Steward with about $575 million in funds throughout the bankruptcy process and gave Steward $25 million as recently as last week, according to testimony from their attorney, Michael Price.

In exchange for the funds, Steward pledged his hospitals as collateral. Price told the court that the Massachusetts agreement undermined the lenders’ ability to secure a loan. A particular sticking point in the agreements was the buyers’ ability to accept obligations in exchange for a lower price—the lawyer argued that the funds should go directly to the estate.

“Total inventory was $24.1 million and (equipment, furniture and equipment) was $17.6 million. (asset purchase agreement) — that’s undisputed,” Price said. “There’s not one penny that’s going to go into the estate. There’s no compensation to the secured lenders who have pledged an interest in that collateral.”

“We don’t want this sale to explode unless it’s absolutely necessary,” Price said. “But what they’re asking them to do is just going too far.”

Still, after taking a break to review the final terms of the deal — filed at 4 a.m. Wednesday — U.S. Bankruptcy Court Judge Christopher Lopez approved the sale, with a few caveats.

Lopez has decided to withhold about $17 million from the sale — a shortfall in Steward’s funds. He will decide later how to allocate the proceeds.

“This is the best deal that’s on the table, and that means a lot,” Lopez said. “It’s been an extensive process. The community has invested an incredible amount of money to get us to this point, and (I) don’t put (hospitals) at risk when there are real people sitting in beds.”

Under the asset purchase agreements, the deal must close by Sept. 30 or the buyers can terminate it. The deals are also subject to state and regulatory reviews.

Ignoring the call

Steward’s CEO stole the spotlight Wednesday when his lawyers wrote to the chairman of the Health Care, Education, Labor and Pensions Committee, Sen. Bernie Sanders, an independent from Vermont, to to talk de la Torre will not testify as scheduled next week.

The commission subpoenaed the director in July, demanding he explain his role in Steward’s alleged financial mismanagement and downfall, the first of its kind in decades.

De la Torre asked to have his testimony postponed until after the federal bankruptcy proceedings. His lawyers said the executive did not want to be a party to a “pseudo-criminal proceeding.”

Steward Health Care declined to comment on the CEO’s decision not to testify next week.

Sanders quickly condemned the decision in a statement Wednesday, saying he was disappointed but not surprised.

“I am now working with members of the HELP Committee to determine the best path forward,” Sanders wrote. “But let me be clear: We will not accept this reprieve. Congress will hold Dr. de la Torre accountable for his greed and the harm he has caused to hospitals and patients across America. This Committee intends to work aggressively to force Dr. de la Torre to testify about his egregious mismanagement of Steward Health Care.”

Massachusetts Senators Edward Markey and Elizabeth Warren called de la Torre’s opposition “outrageous” and said they intended to charge him with contempt of court if he did not appear before Congress as requested.

Looking to the future

A hearing in the sale of the Space Coast Florida hospitals — Melbourne Regional Medical Center, Rockledge Regional Medical Center and Sebastian River Medical Center — is scheduled for Sept. 10. The nonprofit Orlando Health plans to buy the facilities for $439 million. Unlike the Massachusetts deal, Steward expects to keep the value of the transaction and use it to pay its lenders and creditors, according to an Aug. 30 news release.

The steward also gave his name Christ Health Ark-La-Tex, part of Irving, Texas Christ Health, as a stalking horse bidder for Texas’ Wadley Regional Medical Center on Sept. 3. Christus Health offered $4.5 million for the 123-bed facility. Other parties have until Sept. 13 to submit offers. A hearing on the sale is scheduled for Sept. 24.

It also appears that Stewart hospitals in Ohio, which were slated to close just weeks ago, may have a second chance at life.

Steward and MPT informed the court on Aug. 30 that they were brokering a deal under which MPT would take over hospital operations at multiple Steward locations in exchange for “a mutual waiver of all claims under the secured lease obligations between them, including a waiver of billions of dollars in claims that MPT has against Steward.”

More details will be released ahead of the September 10 hearing.

Other deals are still far from closing. Hearings on the Arizona sale have been postponed until a later date, while hearings on the Arkansas and Louisiana — scheduled for Sept. 4 — apparently quietly disappeared from the agenda. When asked about court dates, Steward’s spokesman said, “I don’t have them.”