Columbia Hospital Corp., a for-profit Texas company, says it plans to purchase Miami's failing St. Francis Hospital and assume its $47 million of tax-exempt debt, betting the Internal Revenue Service will not deem the bonds taxable as a result.

Columbia, with net income of $7 million for the first six months of 1991, is a darling of the health-casre analysts community, and St. Francis bondholders -- who watched the facility lose $17 million last year -- are cheered by news that a situation headed for default appears to have a good shot at recovery.

But because Columbia is a for-profit company, the question has been raised whether the IRS would retain the tax-exempt status of St. Francis's outstanding debt.

Health-care analysts say the answer depends on hos desperate the situation has become at St. Francis since the 1983 bond sale and whether it is clear the hospital's sale was not contemplated at the time of the issue.

The bonds were sold eight years ago, so it is reasonably clear Columbia's purchase was not an issue at the time -- Columbia was not even in existence until 1987. And St. Francis's financial health shows a clear picture of deterioration: The facility lost $3.3 million in 1988; $4.7 million in 1989: and $17 million last year. For the first six months of fiscal 1991, the hospital's losses from operations were $8.4 million.

"St Francis would meet anyone's definition of a financially distressed hospital," said Thomas Kenny, manager of municipal research at Franklin Resources Inc.

To find out for sure how the IRS would view the sale, St. Francis asked the service in April for a private letter ruling on whether the bonds would remain tax-exempt. But a decision was delayed by an internal publication project at the IRS expected to address the issue of change of ownership in general. The IRS informed St. Francis's counsel that an answer would have to wait until their position on the general issue became better defined.

Lon B. Smith, the IRS branch chief for tax-exempt bonds, said he is prohibited from discussing individual tax cases. But he confirmed that the service is working on the general issue of what happens to tax-exempt debt when a change of use or change of ownership situation arises. He said officials have been struggling with the question since the start of 1991, but had not set a firm timetable for issuing new regulations or revenue rulings on the matter.

With operations at St. Francis steadily deteriorating, Columbia decided it could not risk the wait.

"Their operation is not doing exceptionally well, and the sooner we can get in there, the quicker we can stop some of the losses," said David C. Colby, chief financial officer at Columbia.

Outside analysts agree Columbia is St. Francis's last hope of avoiding collapse.

"The acquisition is the only thing that will keep this afloat," said Howard Manning, a senior municipal credit market analyst for the Putnam Cos. in Boston.

And the trustee on the issue, SunBank in Orlando, Fla., warned in July, "It is important that bondholders understand that we now believe that the sale represents the only means of avoiding the hospital's bankruptcy and default."

Franklin's Mr. Kenny noted that Columbia has developed a reputation for building physician relationships, which is vital to increasing patient volume. "If you can mend or build a physician staff, that is one of the keys to any turnaround situation," Mr. Kenny said.

And St. Francis, despite its losses, fits nicely into Columbia's business strategy, according to Glenn N. Wagner, vice president of credit research at Morgan Stanley & Co. Mr. Warner noted that Columbia has made five other recent acquisitions in the region, and St. Francis will contribute to the company's long-term plans for Miami.

Mr. Colby said St. Francis offers services such as open heart surgery and obstetrics which Columbia needs in order to bolster its presence in the city. Economies of scale resulting from the sale should immediately help stem some of the losses at St. Francis, he added.

Reassuring bondholders about the sale in the absence of a firm stand from the IRS, Chapman & Cutler, special tax counsel on the deal, advised the trustee in July that it is prepared to issue a qualified tax opinion on the deal.

The opinion, based on existing rulings from the IRS, would say the sale would not change the tax-exempt status of the bonds, according to the trustee. Chapman & Cutler stressed that the opinion is based solely on outstanding IRS opinions and rulings and is not a prediction of how the pending IRS publication project will affect the situation at St. Francis. Officials at Chapman & Cutler declined to discuss the status of individual clients.

While everyone involved agreed the sale was the only method of saving St. Francis, a provision in the 1983 bond indenture created other obstacles for the deal. Section 902(f) says no changes can be made to the indenture -- including the amendment needed to allow the sale -- that might permit interest on the bonds to become taxable. Originally taxability was not an issue, but because the sale is now contemplated in the absence of a firm ruling from the IRS, the trustee required a vote of approval from bondholders.

About 91% of bondholders -- everyone who responded to the request -- agreed to the sale last month, even with the risk that their interest would become taxable. A Florida court then ruled that 100% approval was not necessary, apparently clearing away the last major obstacle to the sale.

Although the existing purchase agreement expires Sept. 30 if the sale is not finalized, parties to the deal say that will probably be extended. Mr. Colby at Columbia said he expects the deal to close "by the end of the year."

With continuing poor results at many 501(c)(3) facilities, acquisitions by investor-owned facilities may be one solution, analysts say. Mr. Wagner, for example, said he expected to see other situations like St. Francis in the future. But he said the trend would remain limited, compared with the sector as a whole.

"A lot will depend on the IRS," Mr. Wagner said.

In the meantime, although Columbia's payments would not be affected even if the bonds were deemed taxable, Mr. Wagner said the company has a strong incentive to work toward maintaining the tax exemption.

"They're going to meet up with other tax-exempt bondholders if they try to do this kind of thing in the future," Mr. Wagner said. "And it would be prudent to act in good faith to protect holders of St. Francis bonds."

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