Astria Health – Lenders Object Vigorously to Proposed DIP Financing, Citing Non-Credible Plan Pushed by Self-Interested “Rented Management Team”

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May 7, 2019 – UMB Bank, N.A., as indenture trustee in respect of the Debtors’ bonds issued in November 2017 ($36.7mn outstanding as at Petition date), and Lapis Advisers, LP, as agent under the Debtors’ Credit Agreement ($10.5mn outstanding, UMBA Bank and Lapis Advisers together, the “Lenders” and holding approximately two-thirds of the Debtors’ nearly $75.0mn of secured funded debt), objected [Docket No. 48] to the Debtors' debtor-in-possession ("DIP") financing motion [Docket No. 15].

The objection states, “The Debtors’ proposed Financing Motion and the loan terms set forth therein (the ‘Proposed Loan’) cannot be approved on either an interim or final basis without significant changes. To be clear, the Lenders support the Debtors’ efforts to remain a going concern, pending a disposition of their assets, and support the Debtors’ efforts to ensure liquidity for post-filing operating costs.

It should be equally clear under all circumstances that the Financing Motion, a cornerstone pleading in the Debtors’ risky standalone restructuring plans, is not credible and not supportable on its present terms given, among other problems, the Debtors’ longstanding financial distress, the Debtors’ current and anticipated cash flow projections, the resources available to the Debtors’ rented management team, and the Debtors’ history of system integration issues…The Lenders comprise more than two-thirds of the Debtors’ nearly $75 million of secured funded debt in these proceedings (the 'Chapter 11 Cases'). The Lenders do not consent to the Financing Motion, the Proposed Loan or the relief contemplated thereby…There is no dispute that the current billing and collection system does not work and has caused material financial harm. But it is hard to overstate the extraordinary and unacceptable risks the Debtors’ strategy would impose on the Lenders and other stakeholders in these cases. There should be significant concern by the Court and all stakeholders whether the Debtors possess the needed resources to implement the Debtors’ standalone turnaround strategy. The Debtors and their rented managers (who stand to lose a lucrative management deal and opportunities to sell other services to the Debtors if the Chapter 11 Cases are not resolved through a standalone plan) would pin all of the enterprise risks of these cases on the Lenders and other creditors. The Debtors have already spent ten months and significant resources implementing their current billing and collection system. This experience alone raises significant doubt over the Debtors’ promises of a timely, successful correction. More concerning, the Debtors’ financial and other issues are longstanding; the Debtors have been in a nonstop turnaround mode for two years and the Chapter 11 Cases are only the latest in a series of challenges, many of them ongoing, that have hampered the Debtors’ business during their entire tenure as a hospital system.”

The objection continues, “The compressed nature of the first day hearing process and the overall complexity of the Proposed Loan make a comprehensive list of Financing Motion problems impractical. With a full reservation of all rights concerning the Financing Motion and related materials, including all rights to supplement the Lenders’ preliminary objections herein in advance of or at any interim or final hearings on the Financing Motion, the Financing Motion and related materials are flawed in at least the following ways:

  • The Debtors want to supersize the Proposed Loan so they can cash out $22 million of other lenders’ secured funded debt using expensive, debtor in possession financing terms;
  • The Debtors have not established the Lenders’ interests can be adequately protected if the Financing Motion is allowed on its current terms;
  • The adequate protection the Debtors have offered omits numerous typical, customary forms of adequate protection relief. Even if the Lenders’ interests can be adequately protected under the Financing Motion, the offered terms do not satisfy the Debtors’ adequate protection obligations; and
  • The Debtors have not established that they conducted any meaningful search for debtor-in-possession financing and not established that the proposed relief sought in the Financing Motion is in the best interests of the Debtors, their estates, the Lenders, or other stakeholders.

The Financing Motion reflects that roughly $22 million of the Debtors’ requested $28 million initial first-day borrowing would be used to cash out prepetition loans made by Banner and MidCap. See Financing Motion at p. 37. The Debtors have not satisfied and cannot satisfy Bankruptcy Rules 4001(b)(2) and 4001(c)(2) in connection with this request and this relief must be denied. Bankruptcy Rules 4001(b)(2) and 4001(c)(2) provide that a court shall not issue an order to in connection with a cash collateral of financing motion in the first 14 days of a chapter 11 proceeding. These rules provide one narrow exception. That exception requires a stiff finding that relief is ‘necessary to avoid immediate and irreparable harm’ pending a final hearing. The Debtors have not provided and cannot provide any showing that this nolook cash out is necessary to avoid ‘immediate and irreparable harm’ and is accordingly permitted in the Chapter 11 Cases. The Debtors have instead argued that this Court should ignore these rules and recognize other “helpful to the Debtors” grounds that this relief is appropriate.”

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