Proton therapy is the newest treatment option for cancer. It replaces certain radiation therapies with a more precise technology which attacks the cancer cells without damage to the outer skin or nearby organs. Also important, it leaves the patient with fewer adverse treatment effects. The equipment to achieve this technological breakthrough is not cheap with one gantry costing in the $20-30 million range. Hence, the cost of a treatment center with its own building can vary greatly depending on how many gantries are included for a given project. In the United States there are presently 39 operating proton centers and 17 more in the planning or construction stage. Of the 39 existing centers, we are aware of 9 which have municipal bond financing. Of those 9 bond issues, totaling some $1.3 billion, all are either in technical or actual payment default with 3 in bankruptcy. Of secondary concern is that 4 of the 10 defaulted issues were by the controversial Wisconsin Public Finance Authority, an issuer of dubious provenance with the highest default rate of current issues, almost all of which were for projects outside their home state. More on this later.
Below is a list of the 9 defaulted issues and their current status. We attribute the fact that they are in default to the report that Covid-19 caused the postponement of cancer testing and diagnosis due to the pressure on hospital capacity resulting from the pandemic as well as the reluctance of individuals to go into a hospital for fear of contracting Covid there. Proton centers deal with diagnosed patients who are good candidates for these facilities, but such diagnosis starts at the hospitals. The fact that two of the bonds are already in bankruptcy is not a clear indication of how these defaults should be addressed. Bankruptcy comes into play when there is a need to either sell a project or restructure its debt principal amount or interest rate. A principal adjustment may be required where a project was overly ambitious in designing a facility with multiple gantries in hopes of achieving economies of scale, a common mistake made by power companies during the nuclear plant era. More telling is the interest rate on the debt since this has to be earned every day.
We are currently in a low interest rate environment where 4% bonds trade at par. Yet, the proton treatment center bonds were issued with coupon rates of from 6.0% to 8.625%. This may have created an insurmountable problem since much of the payment for cancer treatment is by Medicare and they are famous for low reimbursement rates. The standard here may well have been set by early facilities which became part of an existing hospital facility and whose cost for a treatment center was the replacement of an old tech machine with the new ones. Their treatment costs would be substantially lower than in a free-standing proton facility. The long-term solution for current and future projects appears to lie in reducing the debt service cost to a sustainable level. This is where the Wisconsin issues have the biggest problem because they are at ridiculously high levels. This reflects the fact that this authority exercises no meaningful oversight over what they approve. And why should they? After all, it doesn’t affect their state, they maintain no staff for bond approval, and they make a lot of friends by what they don’t do. We have written extensively about the questionable bonds they have authorized and the only reaction we have seen is that the word Wisconsin has been removed for their out of state issues. However, much fault lies with the institutional buyers of these bonds whose lack of concern about the long term is clouded by the short term need to employ cash on hand. We hope that they at least see more information than the often scant amounts filed with the MSRB.
We would not rule out the idea that intentional failure is built into some issues with the objective to squeeze out smaller players down the road at much lower prices. Note the Oklahoma issue below which is probably the best guide of how things may play out in the near future. As for the underwriters who structure such deals, caveat emptor is their motto.
WISCONSIN PUBLIC FINANCE AUTH
ALABAMA PROTON THERAPY CTR
CUSIP 74442PEX9 $81,280,000
COUPON 8.50% 10/01/2047
CURRENT STATUS – In violation of the minimum debt coverage ratio of 1.4 to1. Currently below 1. to 1. Indenture requires a medical consultant to review the project and make recommendations. This has not been done so a technical default has been declared. This issue appears to be as a mirror of the Delray Beach Florida issue except the obligor is being stiffed with an 8.5% interest rate. We do note that one bond trade for $6 million was made on March 24, 2021 at a price of 64.5. This is significant since no payment default was reported. The question here is who bought these bonds and what do they know that the seller does not?
WISCONSIN PUBLIC FINANCE AUTH
MARYLAND PROTON TRMT CNTR
CUSIP 74442PJV8 $267,405,000
COUPON 6.375% 01/01/2048
current status- In order to make their July 1, 2021 interest payment the trustee had to dip into the repair and replacement funds since the debt reserves have been exhausted. The total draw was for $8.0 million to make an $8.7 million interest payment. Bonds have traded in heavy volume up to August 2020 and dropped to 72 from 105.
WISCONSIN PUBLIC FINANCE AUTH
NEW JERSEY PROCURE PROTIN THERAPY
CUSIP 74442PHY4 $150,000,000
COUPON 6.95% MATURITY 7/1/2038
CURRENT STATUS – Issued in July 2018, the audited annual report includes no management comments on how the project is proceeding despite a balance sheet showing an equity position of minus $35 million on assets of $137 million. MSRB has no prospectus on file and shows CUSIP numbers for only $10 million of $150 million in bonds.
WISCONSIN PUBLIC FINANCE AUTH
SEATTLE PROTON CENTER LLC
CUSIP 74442PLM5 $42,650,000
COUPON 8.625% 12/01/2048
CURRENT STATUS- Unknown. Bonds were issued in 2019 but no official statement or documentation has been filed with the MSRB. With an 8.625% interest rate I imagine we will read about its problems in good time.
ATLANTA GA DEV AUTHORITY
GEORGIA PROTON TRMNT CNTR
CUSIP 04781GAD3 $368,447,000
COUPON 6.85% 11/01/2046
CURRENT STATUS – This particular facility is part of Emory University and has 4 gantries which helps to explain the bond issue size. It may also help explain why they retained a consultant in December 2020 to assess their growth prospects. $7 million in bonds trade at 63 following the study. Apparently, there was some disagreement on the report so a new report by a different consultant was commissioned and presented on May 24, 2021. This may have helped in that bond prices rose to 76 on $2 million in trades. However, not content, a third study has been commissioned by a third consultant that should be available at the end of October 2021. The reports are only available to bondholders. Wonder if a potential bond buyer would be eligible to see such a report f before deciding to buy or on a fair price? It’s called “FULL DISCLOSURE” UMB Bank in case you are unfamiliar with the concept. Note that the usual defense by trustees is that it is the seller’s obligation to disclose such matters to the buyer. Perhaps, someday, the SEC may want to weigh-in on this interpretation.
CAPITAL TRUST AGENCY
PROTON THERAPY CENTER, ORLANDO
CUSIP 14052WDD6 $135,470,000
COUPON 7.25% 1/1/2033
CURRENT STATUS – The trustee advised that the December 1, 2020 interest payment would not be made and the bond issue is being accelerated. This was precipitated by the admission by the developer, PCPT Hamlin LLC , that they are unable to meet their payment obligations and have failed to pay their obligations to the construction companies resulting in mechanic’s liens on the project in excess of $2.9 million. in addition, the project is now estimated to need another $7 million, above the $18.7 million being held in the construction account, to complete the facility. The acceleration precipitated a Chapter 11 bankruptcy filing by the developer on December 15, 2020. The facility is not operational and has not received its treatment machinery. The trustee still holds $43.9 million in undisbursed bond proceeds which works out to 32 cents on the dollar. $3.1 million in bonds traded at 32 in January 2021. Guess someone has done the math, however, bondholder claims in the bankruptcy may equal or exceed this amount when the project is sold and completed.
FRANKLIN TN HLTH & EDUC FACS BOARD
PROTON THERAPY CENTER
CUSIP 354732AH2 $113,660,000
COUPON 7.50% 6/01/2047
CURRENT STATUS – The issuer failed to make its payments to fund the June 1,2020 and the December 1, 2020 interest payments. They requested a meeting with bondholders to work out a six-month forbearance agreement. These discussions were apparently fruitless so the borrower filed a Chapter 11 bankruptcy on December 15, 2020. Bonds traded at 30 on December 23, 2020.
KNOX CNTY HLTH EDU HSNG FACS
PROVISION CNTR FOR PROTON THERAPY
CUSIP 49952MCG9 $129,500,000
COUPON 6.00% 5/1/2034
CURRENT STATUS – The center has failed to make its monthly installment payments to the trustee since November 2019. This has continued through May 2021, however bondholders have instructed the trustee not to make the interest payment from reserves which total $10.9 million. On December 15,2020 the obligors filed for Chapter 11 Bankruptcy. No details were given as to the reason for the lack of payments. Bonds dropped to 41 on a $4 million sale on December 21,2020.
OKLAHOMA DEV FIN AUTH
OKLAHOMA PROTON CENTER
CUSIP 6789083W2 $72,170,000
COUPON 7.25% 9/1/2051
CURRENT STATUS – This February 2021 bond issue funded an existing facility which has been operating profitably. It was the only facility we reviewed with no apparent problems. A deeper examination of this project, however, tells a very different story. A story that may well be the blueprint for how the currently troubled projects cited here will pan out.
This facility was actually started in 2009 and cost $126 million. It went into bankruptcy in 2018 with total debts of $163 million. Its assets were then sold for $29 million to a newly formed corporation called Oklahoma Proton Center LLC (OPC). OPC then repackaged the project and sold to a newly formed non-profit organization called the Oklahoma Proton Foundation, the obligor on these new bonds. The purchase price for the project was $62 million, financed with the proceeds of the subject bond issue. The new bonds also carry an interest rate which makes then vulnerable to default however, they have a principal amount well below that of most such issues.
The concern here is that this project was the product of a company called Pro Cure Inc. which is also the father of the Seattle Washington and New Jersey projects detailed here. What appears clear is that if Pro Cure, Inc. is behind the OPC entity which bought this project out of bankruptcy, its failure has been quite lucrative both in the restructuring and the management company contract for the revived project. We can’t confirm that this is the case since the ownership of OPC and the management company is not disclosed. Nevertheless, the debt structure of the Washington and New Jersey bonds along with their use of a dubious issuer such as the Wisconsin Public Finance Authority does not give much hope for a better outcome there.