Sacred Heart Hospital in Norristown, Pa. abruptly closed its doors and fired its staff late Tuesday night in a move that left patients, doctors, and holders of nearly $25 million of outstanding insured debt reeling.
As the facility's 97 patients and 870 employees packed up their belongings and left yesterday, local officials and executives at Municipal Bond Investors Assurance Corp. -- which backs virtually all of the hospital's outstanding bonds -- scrambled to find a way to pick up the pieces.
"It's over. It's an empty building," said Manrico Troncelliti Jr., special counsel to the Montgomery County Higher Education and Health Authority, which issued $30 million of bonds on behalf of Sacred Heart in 1987.
Those bonds are now in default, according to a letter sent to bondholders last week by the trustee, Continental Bank of Norristown.
A $600,000 principal and interest payment due April 15 was made by drawing down the debt service reserve fund, which now stands at about $1.8 million, according to Troncelliti. He said another payment is due June 30, and once the reserve is exhausted, MBIA will be on the hook for principal and interest payments as they come due. The last $17 million of term bonds from the issue mature in 2013.
Officials at MBIA said yesterday they believe the reserve fund will last at least until August 1995, and that when necessary the company will step in to make sure investors are paid.
"Insured bondholders will receive all the principal and interest payments when due as scheduled," said Michael Ballinger, a spokesman for MBIA. The bonds were originally insured by Bond Investors Guaranty Insurance Co., and MBIA assumed liability for the deal when it acquired BIG in 1989. A small portion of the debt has been reinsured, but MBIA declined to identify the reinsurance company.
Sacred Heart's finances have been severely tested in recent years. Fiscal 1993 ended last June with a nearly $9 million deficit for the hospital, Troncelliti said.
The problem, according to hospital analysts, is that the small community has too much hospital capacity, with three separate hospitals including Sacred Heart. Over-capacity is especially acute given Norristown's close proximity to Philadelphia, where well-regarded specialty hospitals abound.
J. Russell Walsh, the hospital's president, did not return phone calls yesterday.
Merger talks between Sacred Heart and the two other facilities have been underway for several months, officials familiar with the negotiations said, but the hospital's cash ran out before a deal could be struck. Analysts said merger attempts could still be made with either of the two, Montgomery Hospital or Suburban General Hospital.
MBIA said it is still too early to discuss how the situation will be worked out. "At this point the situation is too fluid for anyone to predict what the ultimate outcome will be," Thomas Scherer, a senior vice president at the company, said.
David C. Stevens, manager of MBIA's general surveillance department, and Karleen Strayer, vice president in the hospital unit, have been on-site for several weeks trying to avert this week's outcome, local officials said.
Investors holding the bonds were weighing their options yesterday.
"We did own some of these bonds at nine o'clock this morning, but at 9:30 we didn't own them," a source at the Vanguard Group said yesterday. The company sold about $5 million at a price of par plus a half.
"We preferred doing that rather than finding out how well insurance pays," the source said.
The hospital has one other bond issue outstanding, which is insured by AMBAC Indemnity Corp. The $400,000 in remaining outstanding debt from the 1988 issue, which was also sold through the Montgomery County authority, will be paid on time, AMBAC officials stressed yesterday.
The payments coming due are extremely small, with one later this month amounting to a little more than $9,000. That payment will be covered by a debt service reserve fund, but loss reserves have been established to cover future payments, AMBAC officials said.
Aaron L. Task contributed to this article.