NEW YORK – September 19, 2024 – Cerberus Capital Management, L.P. (“Cerberus”) today provided the following statement and additional information related to its former investment in Steward Health Care (“Steward”), which concluded in 2020.
In 2010, affiliates of Cerberus acquired from the Catholic Archdiocese of Boston six operationally and financially failing acute care hospitals. At that time, these hospitals were on the precipice of total failure and closing. Cerberus was the only party to offer a solution to the Archdiocese and the State of Massachusetts following a lengthy and comprehensive review and approval process involving multiple government departments and regulators.
Cerberus’ investment in 2010 rescued and restored critical community hospitals in Massachusetts. The efforts of Cerberus and the Steward management team ensured continued access to healthcare for communities, protected more than 10,000 jobs, and secured the pensions of 13,000 current and former employees. Moreover, the success of the initial investment prompted the State of Massachusetts to request that Steward acquire five additional troubled hospitals, which it did in 2011 and 2012.
Over the next decade, Cerberus supported Steward’s investment of approximately $900 million into facilities, technology, and personnel, as well as quantifiable improvements in the quality of care. At the time Cerberus’ ownership concluded in 2020, Steward had transformed a failing hospital system into a nationally recognized Accountable Care Organization that was financially healthy with substantial liquidity and in compliance with all of its financial covenants. In fact, Steward ended 2020 (more than six months after Cerberus’ sale to affiliates of Steward management and MPT) with access to more than $650 million of total liquidity, including more than $400 million of cash on its balance sheet.
Like many, Cerberus has learned through the media and other reports about Steward’s recent staffing issues, equipment and supply shortages, and patient tragedies due to inadequate care. A review of the testimonies, events, and multiple litigations by vendors and others pending at the time of Steward’s bankruptcy filing in May 2024 appear to be overwhelmingly related to the post-Cerberus ownership period. These reports are deeply disappointing and portray a stark contrast to Cerberus’ ownership period, during which Steward was a growing company serving its communities, delivering high-quality care to millions of patients, and employing thousands of hardworking professionals.
Below are facts and context regarding Cerberus’ investment in Steward from 2010 to 2020. For additional information, please see a copy of the letter provided voluntarily to the United States Senate Committee on Health, Education, Labor and Pensions: Letter to Senate HELP Committee
I: Prior to Cerberus’ Investment in 2010
The State of the Caritas Christi Health Care System Hospitals
Caritas Christi Health Care System (“Caritas”) was a non-profit healthcare system owned and operated by the Catholic Archdiocese of Boston with approximately 12,000 employees. In the years leading up to Cerberus’ investment, the system was on the verge of total failure and in dire need of capital and operational improvements to survive. It also faced a significant shortfall in funding for its employees’ retirement programs, estimated by Caritas to be up to $495 million.
The Review and Approval Process for Cerberus’ Investment
In 2006, the Massachusetts Attorney General and Caritas began an extensive process to find an investor capable of addressing the significant complexities of investing in and restoring a failing hospital system. After a thorough, multi-year review with outside consultants and advisors, the Attorney General, Massachusetts Department of Health, Archdiocese of Boston, and Vatican determined that Cerberus and the management team led by Dr. Ralph de la Torre presented the best solution to the existential issues facing the hospital system.
II: Immediate Benefits of Cerberus’ 2010 Investment
On November 5, 2010, the transaction with Cerberus affiliates and Dr. de La Torre’s management team closed, bringing approximately $895 million of fresh capital and financial commitments to the failing Caritas healthcare system. This figure included Steward’s agreement to assume current and future pension obligations up to $495 million and its commitment to invest $400 million of additional capital during the subsequent four years to restore and improve the six initially acquired Caritas hospitals. These commitments were met, and exceeded.
In addition, Cerberus’ initial $246 million equity investment enabled the immediate retirement of approximately $250 million of Caritas’ net debt obligations.
Beyond capital and financial commitments, Cerberus’ investment saved multiple hospitals that would have otherwise closed more than a decade ago, putting thousands of employees out of work, and leaving the communities served by these hospitals devoid of necessary healthcare services. The transaction not only rescued, but restored critical community hospitals during Cerberus’ ownership and demonstrated the value added by private investment.
Cerberus’ Role at Steward
For the duration of its investment, Cerberus operated as a shareholder of Steward while the day-to-day management and operations were, as is customary, led by the Chief Executive Officer and management. Steward’s well-qualified Board of Directors was led by Dr. de la Torre as Chairman and included two independent directors from the original Caritas Board and five directors appointed by Cerberus, including James Lenehan, former President and Vice Chairman of the Board at Johnson & Johnson. In subsequent years, additional experienced board members were added, including former Speaker of the U.S. House of Representatives, John Boehner and former U.S. National Security Advisor General H.R. McMaster.
III: Improvements During Cerberus’ Investment
After rescuing the former Caritas hospitals, Steward’s focus was on rebuilding and expanding the hospital system to deliver high-quality healthcare at lower costs of care for patients. The management team led this strategy and emphasized enhancements in operations, significant investments in facilities, technology and strategic acquisitions, and improvements in the quality of patient care. By the time Cerberus’ ownership concluded in early 2020, Steward had transformed from a failing hospital system into a nationally recognized Accountable Care Organization.
Invested Capital
In the first two years of Cerberus’ investment (2011, 2012), Steward invested most of the $542 million, four-year capital requirement in the original six Caritas hospitals and the five additional hospitals. Steward met the obligation of $400 million in four years for the original six hospitals and met the obligation of $142 million in the first four years for the additional five. By 2015, approximately $692 million of capital was invested in eleven hospitals, exceeding total capital commitments by $150 million. In total, during Cerberus’ ownership nearly $900 million was invested in hospital infrastructure, technology, personnel, and other major projects.
Investments were made in new or significantly renovated and expanded emergency rooms, operating rooms, clinical spaces, as well as new radiation therapy, cardiac catheterization lab, and medical offices. Additional space was also added for trauma and fast track patients; larger ambulance bays and patient areas; the creation of post-operative care units; and converting quad-room beds to semi-private rooms.
Capital investments also facilitated the full funding of the pension obligations of approximately 13,000 current and former employees, which were otherwise at grave risk according to Caritas and the Massachusetts Attorney General.
Quality of Care Improvements
Steward continuously invested in its personnel and recruited top physicians to improve the quality and scope of overall care. In just two years following Cerberus’ initial investment, there were quantifiable improvements to patient care, including improvements in patient mortality, evidence-based care delivery for cardiac, and re-admissions of admitted patients.
Steward’s Financial Position
Steward was financially healthy throughout Cerberus’ ownership, including when ownership was transferred to affiliates of Dr. de la Torre and Medical Properties Trust (“MPT”) in 2020. At that time, Steward had substantial liquidity – with access to more than $650 million of liquidity, including $400 million of cash on its balance sheet – and was in compliance with all of its financial covenants.
IV: 2016 MPT Transaction
In September 2016 Steward announced a $1.25 billion transaction with MPT comprised of $600 million of proceeds from the sale-leaseback of five of the original six Caritas acute care facilities, $600 million of proceeds from refinancing mortgages on four other Steward-owned acute-care hospitals and a $50 million equity investment by MPT (for a 4.9% interest in Steward). The transaction, led by the Steward management team, supported the hospital system’s strategy to invest in current facilities, expand nationally, and continue to provide high quality, affordable, community-based healthcare services. The agreement brought in a new capital partner, which was a testament to the strength of the platform and included a $1 billion commitment from MPT to fund future capital and strategic investments.
Use of Funds
The transaction provided Steward with $460 million in pretax liquidity, which it used to retire $385 million in interest-bearing, secured debt. The remainder of that amount was retained for working capital and future investments. A portion of the transaction proceeds were used to return Cerberus’ equity investment and provide a dividend of $473 million, which was the first distribution of capital and, ultimately, the only distribution, from Steward to Cerberus. Dr. de la Torre and his team received a $71 million dividend on account of their equity ownership.
Steward’s Operating and Financial Health Post-MPT Transaction
Both external third-party and internal Steward management projections reflected that Steward had more than ample cash flow, liquidity, and reserves to fulfill its lease obligations and all other projected obligations. During Cerberus’ ownership, Steward was at all times solvent and had more than sufficient cash and liquidity at the time of, and after, the 2016 MPT transaction including through the 2020 sale to affiliates of Dr. de la Torre and MPT.
V: Conclusion of Cerberus’ Ownership
2020 Recapitalization Transaction
The Company’s Board of Directors – led by Chairman and Chief Executive Officer Dr. de la Torre and with Cerberus’ support – determined that it would be prudent to raise additional capital to help navigate the potential impact of the COVID-19 pandemic on hospitals in the United States. Cerberus was unable to provide material additional funding as its funds were out of, or ending, their respective investment and follow-on periods. As a solution, Steward and Cerberus entered a recapitalization transaction with MPT, which provided additional liquidity to Steward and transferred Cerberus’ ownership interest to a management group of Steward physicians led by Dr. de la Torre. In conjunction with the transaction, Steward stated the following:
“As part of the recapitalization transaction, no additional leverage was added to the Company’s balance sheet and Cerberus’ controlling interest was exchanged for a convertible note. The management group of Steward Health Care physicians will control 90 percent of the Company and Medical Properties Trust will maintain its previous 10 percent stake. The recapitalization transaction improves the Company’s balance sheet and gives Steward Health Care financial strength to successfully navigate the COVID-19 pandemic.”
Terms of the 2020 Transaction
Cerberus’ convertible note did not require any payments prior to its five-year maturity and was an obligation of affiliates of Dr. de la Torre, his management team, and MPT, not the Steward hospitals’ operating company. The transaction was conditioned upon the infusion of $400 million of fresh capital onto Steward’s balance sheet, without adding any leverage or financial obligations. This was a significant, positive event for Steward and helped ensure that the Company was well-funded to meet the needs of its patients, the communities that it served, and all other stakeholders.
VI: Following Cerberus’ Exit in 2020
At the time ownership was transferred from Cerberus in 2020, Steward had expanded and enhanced operations, increased liquidity, upgraded the quality and depth of its teams and, importantly, improved the quality of patient care. The hospital system was transformed into a nationally recognized Accountable Care Organization that, although concerns relating to the impact of the COVID-19 pandemic existed, was financially healthy with substantial liquidity and in compliance with all of its financial covenants. As noted, its financial condition was supplemented by Cerberus’ requirement that $400 million of equity capital – not debt – be added to the balance sheet as a condition of the 2020 transaction.
Steward’s May 2024 Bankruptcy Filing
Cerberus did not have direct knowledge of Steward’s performance and management decisions following the conclusion of its controlling ownership in 2020. Reference should be made to Steward’s filings with the Bankruptcy Court for a discussion of what led to its financial distress.
VII: Concerning Recent Statements Made by Dr. de la Torre
Regarding Cerberus’ Proceeds
The statement made by Dr. de la Torre that Cerberus received $1.1 billion from Steward during the last four years of its ownership is false and inaccurate. There were no proceeds exchanged at the time of the 2020 management buyout of Cerberus’ equity. When the note was voluntarily pre-paid, four years early in 2021 at the discretion of Dr. de la Torre, the proceeds came from the obligors on the note, which were affiliates of Dr. de la Torre and MPT, not Steward. Cerberus specifically structured the transaction in this manner so as not to have any impact on Steward’s balance sheet at the time of the buyout, when the impacts of COVID-19 remained uncertain. As noted above, the only distribution received by Cerberus from Steward occurred in 2016 via the MPT transaction.
Regarding Dr. de la Torre’s Personal Guarantee and the $111 Million Dividend
Cerberus is unaware of any financial investment made by Dr. de la Torre into Steward during its ownership. Cerberus also has no knowledge of the $200 million loan that Dr. de la Torre purported to guarantee; however, from his public statements, it appears that he and his management affiliates borrowed funds to facilitate their acquisition of Steward’s equity from Cerberus, which Dr. de la Torre guaranteed and secured with the stock that he purchased from Cerberus.
In addition, Dr. de la Torre has attempted to justify the $111 million dividend paid out to himself, his management team, and MPT shortly after Cerberus’ exit by citing Steward’s financial health in 2021. His website states: “At the time the distribution was made, to offset the guarantee by Dr. de la Torre, Steward Health Care System LLC had sufficient cash on hand, in part due to the infusion that was facilitated by Dr. de la Torre’s guarantee.”
According to Dr. de la Torre, the $111 million dividend was approved by “the requisite shareholders at the time.” Cerberus’ understanding is that Dr. de la Torre owned or controlled the majority of Steward’s equity at that time. Cerberus had nothing to do with that dividend. The fact that the dividend proceeds were used to pay down Dr. de la Torre’s personal obligation, about one year after it was incurred, reflects no benefit to Steward. This appears to be confirmed by his statement that the proceeds of the note were deemed to be a capital contribution.
Regarding Bankruptcy During Cerberus’ Ownership
Dr. de la Torre has claimed that at one point in time Cerberus suggested Steward file for bankruptcy and that this was the reason for the 2020 transaction. This is patently false. At no time did Cerberus ever suggest that Steward file for bankruptcy. Cerberus structured the sale to the Dr. de la Torre-led management affiliate and MPT with a five year, no amortization, convertible note, reflecting its long-term view of Steward’s viability. Bankruptcy would have destroyed the value of Steward and thus Cerberus’ remaining equity value. As noted above, Cerberus and Dr. de la Torre agree that Steward was adequately capitalized during the entire time of Cerberus’ ownership, including before and after the MPT transaction in 2016, the sale of Cerberus’ equity in 2020, and the voluntary pre-payment of its note in 2021.
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