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California’s Verity Health System Files Chapter 11; Ally Bank Agents $185MM DIP Commitment

September 04, 2018, 08:01 AM
Filed Under: Healthcare

Verity Health System of California, Inc., a nonprofit healthcare system, today filed voluntary petitions for protection under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Central District of California – Los Angeles Division. Verity has secured debtor-in-possession financing of up to $185 million. This additional liquidity will enable continued operations without interruption to high-quality patient care, employees and suppliers throughout the Chapter 11 process.

According to court records, Ally Bank is serving as administrative agent for the DIP financing. 

The bankruptcy filing follows Verity’s previous announcement in July which stated that the System has been exploring strategic options to address the issues facing the System. Today’s announcement follows a thorough process of considering a range of alternatives for the System’s hospitals, including the potential sale of some or all of the hospitals and related healthcare businesses.

“After a diligent process of assessing all possible options alongside our financial and legal advisors, Verity Health has made the best strategic decision for all of our patients, employees and other stakeholders,” said Rich Adcock, CEO of Verity Health. “Despite many efforts over the last decade to create opportunities for success, we can no longer swim against the tide of our operating reality, which includes a legacy burden of more than a billion dollars of bond debt and unfunded pension liabilities, an inability to renegotiate burdensome contracts, the continuing need for significant capital expenditures for seismic obligations and aging infrastructure.”

Adcock continued: “Several other hospitals in California and across the U.S. have completed this process and have emerged to continue to care for patients, support employees, and serve the community. Those hospitals are now in improved financial and operational health. We are confident that today is a first critical step toward putting each facility on better footing for the future. Most importantly, we remain focused on our commitment to providing high-quality care to patients in underserved communities without disruption throughout this process.”

Verity Health plans to consummate sales under Section 363 of the U.S. Bankruptcy Code. Potential buyers will have the opportunity to submit offers to acquire assets, including O’Connor Hospital, Saint Louise Regional Hospital, Seton Medical Center, Seton Medical Center Coastside, St. Vincent Medical Center and St. Francis Medical Center. All offers will be evaluated to ensure the highest and best acquisition agreement(s) are achieved for the benefit of Verity Health’s patients, employees, creditors and other stakeholder groups.

“We are pursuing various strategic options for each of our six hospitals, with a focus on working with potential buyers who can continue the mission of patient care at each hospital,” said Mr. Adcock. “Through the sales process, we will be putting our hospitals in a better position for long-term success.”

The System was originally owned and operated by the Daughters of Charity of St. Vincent de Paul, Province of the West. Verity Health was formed in July 2015, when the Daughters of Charity selected BlueMountain Capital Management LLC (“BlueMountain”), a private investment firm, to recapitalize the health systems operations and transition leadership of the health system to the new Verity Health System. Prior to that, Daughters of Charity had been unsuccessful in an affiliation with Ascension Health Alliance and a sale to Prime Healthcare Services.

The financial and operational issues facing Verity Health System, are born out of a myriad of inherited, historical challenges. Operating losses had plagued the System’s predecessor for some time due to, among other things, challenging cost structure, low reimbursement rates and the ever-changing healthcare landscape.

“After years of investment to assist in improving cash flow and operations, Verity’s losses continue to amount to approximately $175 million annually on a cash flow basis,” said Mr. Adcock.

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