By Josh Mitchell
Corinth Today News Editor
Magnolia Regional Health Center last month filed an amended lawsuit against Regions Bank.
The hospital is seeking protection from a potential default on millions of dollars in bonds issued about seven years ago. New accounting rules passed after the bonds were issued have negatively impacted the hospital’s financial statements.
MRHC must now report a proportional share of the state retirement system’s unfunded liability. This makes it appear as though the 200-bed hospital has more than $127 million in unfunded pension liability, “which in truth does not exist,” the hospital’s lawsuit said.
The hospital’s bond rating was recently downgraded by global credit rating agency Moody’s.
MRHC has never missed a bond payment and remains “financially viable” but is now in danger of violating bond covenants due to the new accounting standards, the lawsuit added.
Regions said the hospital’s lawsuit should be dismissed and that the Alcorn County Chancery Court lacks jurisdiction.
“Magnolia Regional’s lawsuit must be dismissed because it has failed to join the bondholders, each of whom has an interest in the subject of this action,” Regions’ response said.
The bondholders’ ability to protect their interests may be impaired if they are not named in the lawsuit, Regions added.
Neither Regions nor any bondholder should have the right to declare the hospital in default based on the negative impacts of the unfunded pension liability, MRHC asserted.
The hospital is jointly owned by the city of Corinth and Alcorn County.
MRHC issued $82.9 million in bonds about seven years ago to “improve the quality and availability of health services . . .,” according to the lawsuit.
MRHC executed an agreement with Regions to require the hospital to pay back the bonds “through its gross revenue,” the lawsuit added. Regions is “master trustee” for the bonds and can “act on behalf of the bond holders,” the hospital said in the lawsuit.
However, Regions “categorically denies” that it is a “representative of all bondholders.”
“If Magnolia Regional seeks its lawsuit to have binding effect on the bondholders, it must join them in this lawsuit,” Regions said.
MRHC would commit an “event of default” if it failed to maintain an income/debt ratio of 100 percent, according to Regions. MRHC said its auditors, Horne LLP, expect the hospital to fall below the 100 percent requirement in the next audit.
If that occurs, master trustee Regions, “upon written request” of at least 25 percent of the bondholders, could take action on behalf of the bondholders “including but not limited to assuming operations of Magnolia Regional,” the lawsuit said.
But Regions denied that written request of 25 percent of the bondholders is required.
The hospital appeared to have a negative net worth of $23 million due to the new accounting standards. That “does not accurately reflect Magnolia’s true financial state,” the hospital’s lawsuit said.
The state is required to fund the retirement system, the hospital asserted. MRHC said it is backed up by state statute and an attorney general’s opinion. Magnolia has met all required pension obligations, the lawsuit added.
Bond covenants also require Magnolia to hire a consultant if it fails to maintain an income/debt ratio of 125 percent. The hospital’s income/debt ratio has dropped to 117 percent due to the unfunded pension liability.
But a preliminary injunction granted by the chancery court in March prevents Regions from requiring the hospital to hire a consultant based solely on the unfunded pension liability.
Chancellor Stephen Bailey found that the hospital would suffer “irreparable harm” if it had to terminate MRHC employees or discontinue services based on a consultant’s recommendations. Area residents would also be negatively impacted by the potential loss of medical care, the judge’s order added.
The preliminary injunction will remain in place until the hospital’s lawsuit is resolved or until the court dissolves or modifies the injunction.