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Medical Properties Trust defends not disclosing hold on Prospect debt repayment transaction

by John R. Fischer, Senior Reporter | August 28, 2023
Business Affairs
Medical Properties Trust failed to disclose a financial hold on a repayment transaction involving its affiliate, Prospect Medical Holdings.
Earlier this year, Medical Properties Trust (MPT), the largest hospital real estate firm in the U.S., entered a recapitalization agreement, in which its affiliate, Prospect Medical Holdings (PMH), would pay off its material debts and lease obligations with $375 million from third-party lenders, using the money to liquefy operations at its 17 hospitals and over 165 clinics and outpatient centers, and scale its managed care business, PHP Holdings. The deal would leave it with only debts it owed to MPT and the third-party lenders, with MPT receiving equity in PHP, instead of cash payment for loans, unpaid rent, and other outstanding amounts.

When announced in May, MPT called it a done deal. But a recent Wall Street Journal Story revealed that the California Department of Managed Health Care (DMHC) placed a hold on the transaction in July to obtain more information — a fact that MPT failed to disclose in its second-quarterly earnings statement.

Not disclosing holds risks negatively affecting credit and disrupting debt repayment plans for all parties involved. It also risks straining relationships with creditors and lenders and can lead them to pursue legal action, among other consequences.

In a statement, MPT called the article "false and misleading," saying that holds like this are a “standard, expected, and noncontroversial part of the approval process for this transaction,” and that it has been advised that the chances of regulators not approving the transaction are “highly unlikely.”

"In the unlikely event that the regulator does not grant approval for the transaction, MPT's investment in PHP would remain a convertible note with identical economics to equity ownership. As a result, DMHC's request was deemed immaterial to MPT's financials and thus did not require disclosure,” said MPT.

It maintains that it legally complied with accounting requirements in the report about its $68 million equity investment as part of its earnings for that quarter and that the DMHC approval process was entirely unrelated.

It also accused the Journal of “wholly disregarding” information it supplied about the transaction and its investment in PHP, and of proceeding with the story without giving Prospect a chance to clarify necessary details, despite the hospital operator saying that it would.

Amid rising interest rates and tighter margins, MPT is facing a period of contraction, and has been lending financial support to its affiliates, including Prospect and Steward Health Care, reported financial global news outlet PYMNTS.

According to Benzinga, MPT will continue to look at refinancing, sales, and joint venture options for repaying debt, and has identified certain non-leased and non-real estate assets to be sold. It will also scale back discretionary operating expenses.

MPT was formed in 2003 in Alabama and has grown to manage 444 facilities and approximately 44,000 licensed beds in ten countries and across four continents.

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