The U.S. Bankruptcy Court approved a motion Wednesday that will allow Astria Health to secure new financing and avoid defaulting on its current debtor-in-possession loan.
With the ruling from Judge Whitman L. Holt, Astria Health will be able to initially borrow $38 million from Lapis Advisers to pay off debtor-in-possession financing from Los Angeles-based JMB Capital Partners Lending.
The loan was set to mature by the end of this year, which would subject Astria Health to $3 million in fees along with other penalties.
When the Yakima-based nonprofit health care system filed for Chapter 11 bankruptcy protection in May, it expected to emerge from bankruptcy by year’s end, anticipating progress on revenue collection through a new vendor.
In the last few months, however, as Astria Health has continued to be weighed down by financial struggles at its largest hospital, Astria Regional Medical Center in Yakima, the organization has had to shift gears.
One key move is shifting to a dual-track bankruptcy process. Astria Health is now working with Piper Jaffray to either secure financing for an internal reorganization or find a buyer for some or all of its assets, which include hospitals in Yakima, Toppenish and Sunnyside and a family of medical clinics.
Now with the bankruptcy going into 2020, Astria Health needs to pay off its current debtor-in-possession financing and secure additional funds to maintain operations. In the motion, Astria Health sought approval to borrow up to $42.8 million from Lapis Advisers.
However, some parties, including the Unsecured Creditors Committee, had concerns regarding Lapis Advisers taking on the debtor-in-possession role.
Andrew Sherman, attorney for the Unsecured Creditors Committee, questioned whether it was in Astria Health’s best interest to take on new financing from Lapis Advisers and give them additional protections that could negatively affect Astria Health and other creditors.
“What was the debtor’s business judgment to take the replacement financing from Lapis with all the bells and whistles against going down the road (of maintaining) the existing JMB (loan)?” Sherman said.
While JMB Capital Partners Lending discussed some possible proposals, ultimately, the Lapis Advisers offer was the only official offer and provided the most favorable terms, said Astria Health attorney Sam Alberts.
“JMB still had an opportunity to offer a counteroffer,” he said Wednesday. “They never did.”
Holt said that he would be more comfortable with these protections if there were money set aside for employees to ensure continued operations should any issues arise.
After several hours of back-and-forth, Lapis Advisers agreed to set aside $1 million of pre-petition collateral proceeds for any unpaid payroll for Astria Health employees. Holt said he would go ahead and approve the plan, as long as there are no objections to Lapis Advisers’ proposal. If anyone objects, Holt will have a hearing Monday to resolve the issue.
Holt said his decision to approve new financing was driven by his desire to prevent a potential hospital closure or cause harm to Astria Health’s operations.
To that end, Holt also ordered to allow Astria Health to borrow an additional $700,000 from Lapis to bolster Astria Health’s budget for January.
“I think the need for (Astria Health) to have liquidity going into 2020 is self-evident,” he said.
Holt will decide during a status conference next month whether Astria Health can borrow nearly $5 million more from Lapis Advisers.
By next month, Holt said, Astria Health should have a better idea of its reorganization plan.
During the hearing Wednesday, Astria Health provided an update on its reorganization efforts. The organization said it expects to receive bids for its assets, including one from a “large nonprofit health system” in the coming days.
There is also interest from lenders who could extend exit financing to Astria Health.
Depending on how reorganization efforts play out, Astria Health’s need for additional debtor-in-possession financing could change, said Alberts, Astria Health’s attorney.
“Our budget of what we may need may be less than $5 million,” he said. “We want the capacity to borrow it, but the reality is we may need less than that.”
Editor's note: The story was edited to correct the name of Astria Health's hospital in Yakima, Astria Regional Medical Center.