Butler Health System, part of the now-merged Independence Health System, is close to reaching a deal with the trustee of its bonds which would relieve some of the hospital system’s debt pressure and allow it to recover faster from years of COVID-19-related financial losses.

The master trustee of the bonds, Minnesota-based UMB Bank, has reached a tentative agreement with Butler Health System that would waive the hospital system’s breaches of debt service coverage covenants for fiscal periods ending June 2023 and June 2024.

“We are gratified that both of our lender groups have been very cooperative throughout these negotiations,” said Tom Albanesi, chief financial officer for Independence Health System, on Wednesday, Nov. 20. “Our focus remains on our turnaround initiatives that are providing positive results for our organization.”

Under this deal, the Butler Health System would obtain a forbearance which would last until New Year’s Eve 2025.

The deal — the terms of which are only tentative — also include the creation of a $1 million reserve fund, and a requirement for enhanced financial reporting from the Butler Health System during the forbearance period. A lien or mortgage would also be placed on Clarion Hospital and “certain (other) Obligated Group real estate that is not presently pledged as collateral.”

The original bonds were issued in 2015, and one of the covenants attached to them is a requirement that the hospital system maintain a debt service coverage ratio of 1.1 to 1. This means that they were required to bring in an amount of operating income 1.1 times the amount of its debt service.

The debt service coverage ratio covenant is a measure of the debtor’s ability to cover its debts.

Butler Health System missed this target for the fiscal years ending June 2023 and June 2024, with a debt service coverage ratio of negative 2.28 to 1 at year-end 2023 (meaning it had negative income that year available for debt service), and 0.39 to 1 at year-end 2024.

This, along with other negative news, prompted credit rating agency Moody’s to downgrade Butler Health System’s rating twice since May 2023, sending it from Baa3 to Ba1 by March 2024.

Although Butler Health System merged with Excela Health at the start of 2023 to form Independence Health System, the two halves still file separate financial reports. Butler Health System consists of Butler Memorial Hospital, Clarion Hospital, realty management subsidiary Nixsar Corporation, and a nonprofit fundraising foundation, among other components.

UMB Bank took over from fellow Minnesota-based bank U.S. Bank as master trustee in December 2023.

A meeting of bondholders was called on Wednesday afternoon. This meeting was not open to the public, and executives from Butler Health System did not attend.