Doctor-led group makes buyout offer for Sacred Heart.

Sacred Heart Hospital, with $25 million of outstanding defaulted debt backed by Municipal Bond Investors Assurance Corp., this week was offered a buyout bid from a group headed by a physician who used to work at the now-closed hospital.

The Norristown, Pa., hospital accepted the $4.1 million offer from Sacred Heart Acquisition Corp., according to the hospital's bankruptcy lawyer, Vincent J. Marriott.

The corporation's principal investor and head negotiator is Dr. Francis Bonnet Jr., a former director of Sacred Heart's department of physical medicine and rehabilitation. The group plans to convert Sacred Heart to a physical rehabilitation center, Marriott said.

The bid must be filed with the bankruptcy court, and other potential buyers could still outbid Bonner's for the hospital. The court is expected to set an auction date, which could be between 30 to 60 days from now, Marriott said.

Bonner's bid beats a previous $3.25 million bid from nearby Montgomery Hospital, also located in Norristown.

"We're going to wait and see what happens in bankruptcy court," said Elizabeth Rorison Bantely, spokeswoman for Montgomery Hospital. "It's our understanding that the matter will be resolved in auction."

Regardless of who ultimately buys Sacred Heart, MBIA will still be responsible for making debt payments to bondholders, according to David Stevens, vice president and manger of MBIA's general surveillance department. Of the original $30 million issuance, approximately $5 million has been repaid by the hospital, leaving MBIA to cover the remaining $25 million.

"Some amount of the money from the sale will go to [MBIA], but it's really too early to say," Stevens said. "If the hospital is sold, that will have an accounting effect on MBIA, but from the bondholders' perspective, it will be irrelevant because the payments will be made by MBIA."

MBIA does not expect to begin making any of the debt payments for at least another six months to a year, Stevens said.

MBIA inherited the debt when it acquired Bond Investors Guaranty Insurance Co., the original insurer of the Sacred Heart bonds, in 1989.

Separately, Reps. Marjorie Margolis-Mezvinsky, D-Pa. and Henry Waxman, D-Calif., held a hearing before the House subcommittee on health and the environment last Monday. The hearing was to investigate why Sacred Heart closed so rapidly in May after a long period of steadily declining performance.

Stevens testified about MBIA's involvement with the hospital, including how Sacred Heart management asked to borrow $2.5 million from the insurer to bring itself out of debt.

Sacred Heart management told MBIA that the money would permit a merger with Montgomery Hospital.

MBIA initially agreed to consider a loan for up to $3.5 million. However, the Hunter Group, a consulting firm, found the hospital would need as much as $9 million to support it until a merger could be arranged. Hunter also said the time needed for a merger was unrealistic. MBIA then declined the loan, according to Stevens' testimony.

MBIA did offer a $700,000 loan to allow financially stable areas of the hospital, such as the rehabilitation center, to continue operating. MBIA required in exchange for the loan that the hospital go into state court receivership instead of bankruptcy, Stevens testified. Sacred Heart declined the offer.

Hospital officials said the proposed new use of the hospital as a rehabilitation center seems reasonable.

"It is a use which is consistent with what the community needs," Marriott said. "Norristown had an overcapacity of acute care facilities. Now it has an undercapacity of rehabilitation facilities."

The rehabilitation center at Sacred Hospital was one part of the hospital that did relatively well financially, according to sources familiar with the facility. Laime Vaitkus is a reporter for The Guarantor, The Bond Buyer's credit enhancement newsletter.

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