Palomar Health Bond Trustee Announces Amendments to Forbearance Agreement; Palomar, UCSD Health Negotiating JPA Transaction

Successor trustee U.S. Bank Trust Co. announced a series of forbearance amendments and a potential joint powers authority, or JPA, transaction between Palomar Health and UC San Diego Health, or UCSD, according to notices posted to EMMA on Oct. 17. The securities associated with these notices totaled $721.3 million, including the following:

• $246.8 million in principal amount of Series 2016 revenue refunding bonds;
• $151.5 million in principal amount of Series 2017 revenue refunding bonds;
• $60.1 million in principal amount of Series 2017 certificates of participation, or COPs;
• $229.2 million in principal amount of Series 2022A COPs; and
• $33.8 million in principal amount of Series 2022B COPs.

U.S. Bank further noted in the Series 2016 disclosure that in its role as Series 2016 bond trustee and at the direction of holders representing a majority of the aggregate principal amount of the Series 2016 bonds, it retained Mintz Levin as special counsel.

The 4% Series 2016 bonds due November 2039 last traded on Oct. 15 with $40,000 in volume at roughly 72 to yield 7.1%, which was at a steep discount from its issuance price of 101.154 to yield 3.86% in October 2016, according to secondary trading data on EMMA.

On Oct. 10, S&P Global Ratings lowered Palomar’s debt ratings to CCC+ from B and placed the credit on a negative CreditWatch, reflecting the ratings agency’s view on Palomar’s “extremely thin unrestricted reserves that have weakened considerably” since January and its dependency on favorable market conditions to fulfill its financial commitments.

Forbearance Amendment

The trustee’s notices state that in connection with master indenture amendments in April and July relating to $30 million in loans from UCSD, Palomar’s forbearance agreement was amended to grant U.S. Bank, as master trustee, “a security interest in substantially all personal property assets of all Obligated Group Members, as additional collateral to secure all outstanding Master Indenture Obligations and further to provide for the granting of certain deposit account control agreements with respect to certain operating deposit accounts and investment accounts of the Obligated Group Members.”

Palomar, which is a San Diego-based healthcare district and a political subdivision of the state of California, originally entered into a forbearance agreement with Assured Guaranty in January. According to the Oct. 17 notices, Assured issued municipal bond insurance for Palomar’s Series 2017 bonds due 2047 and its Series 2022 COPs in addition to providing debt service reserve insurance policies for all Series 2017 bonds and the Series 2017 COPs.

The notices state that under the forbearance agreement, U.S. Bank agreed to “forbear from exercising their general debt acceleration, enforcement and collection rights and remedies available under the Master Indenture and the Insurer Related Documents as a result of the occurrence and continuance” of certain identified defaults “for one year.”

U.S. Bank also does not “intend to take any action to exercise its general debt acceleration, enforcement and collection rights and remedies” unless “directed and indemnified” under the applicable bond indentures, according to the notices.

JPA Transaction

Leadership for Palomar and UCSD signed a letter of intent in July to form a JPA that would “‘oversee the operations of Palomar Health and enable shared investment in services and infrastructure,’” according to the filings, and Palomar Health and UCSD say they intend to finalize the details of this partnership late this year.

The notices state that if the JPA transaction is effectuated, “there is the possibility that with the direction of a Holders or Assured as a deemed Holder of a majority of the outstanding Master Indenture Obligations, such transactions could involve additional amendments to each of the Master Indenture and the Forbearance Agreement.”