The Butler County commissioners approved a forbearance agreement that allows Butler Health System to resolve a default of the obligations of its tax-exempt bonds by the end of this year.

The agreement, which was approved Wednesday, calls for BHS, which, along with Excela Health System makes up Independence Health System, to reissue public, tax-exempt revenue bonds originally issued by the Butler County Hospital Authority in 2009 and 2015 and provide additional mortgages as collateral.

Jamie Inferrera, attorney with Dinsmore & Shohl, who represents BHS, said BHS didn’t default on its bond payments.

Instead, BHS didn’t have enough cash on hand to satisfy the financial covenants of the bonds for two years. Inferrera called it a “debt service coverage ratio default.”

She said the forbearance agreement does not include refinancing the bonds or placing additional liability upon the county, but the commissioners’ approval is needed to maintain the tax exempt status of the bonds.

The bonds were issued as public debt by the authority, said Leslie Osche, commissioners chairwoman. The commissioners appoint the authority members, but the commissioners have to approve the agreement because they are the highest ranking elected officials in the county, she said.

Inferrera said the authority is the “conduit issuer” of the bonds, but the authority is under the control of the commissioners.

The series 2009A variable rate hospital revenue bonds were issued in the principal amount of $50 million, but the currently outstanding principal amount is $27.8 million. The original principal amount of the series 2015A hospital revenue bonds was $90.6 million and the current principal is $67.8 million.

The authority held a Tax Equity and Fiscal Responsibility Act meeting remotely Tuesday to accept public comment about the agreement and vote on it. No public comment was offered, and the authority approved the agreement, Inferrera said.

As a part of the agreement, BHS is giving additional mortgages to the bondholders as collateral contingent on the bondholders approving the deal. The agreement includes Truist Bank, which holds about $15 million in BHS private debt, she said.

Inferrera said BHS is working on a “turn around” plan with FTI Consulting that should quickly resolve the issue.

“We actually expect the system to come back in compliance with its covenants by the end of this year,” Inferrera said.

Independence Health System CFO Tom Albanesi issued the following statement about the agreement after the commissioners’ meeting.

“The approval of the Butler County commissioners was a necessary legal step in the process of obtaining a forbearance agreement with Butler Health System’s lenders. A forbearance agreement is a positive development in that it is an agreement with the lenders that provides Butler Health System additional time to execute its’ operational turnaround plan.

“The operational turnaround plan was necessitated when Butler Health System did not achieve the mandated debt service coverage ratio covenants that are a requirement of the lender agreements. Like many health systems, Butler Health System is challenged by significant inflation of its’ labor and supply expenses, which are not fully reflected in the rates we are being paid by insurers and governmental payors. Butler Health System has made and will continue to make all its scheduled debt service payments in full and on-time.”

Butler Health System’s $150 million debt was refinanced in 2015. About $15 million is owed to Truist Bank, while the rest is owed to holders of hospital bonds issued in 2015. The tax exempt bonds are owned by mutual funds. BHS took on the debt to fund a series of construction projects, including a new medical office building at Butler Memorial Hospital.

The original $150 million has been whittled down to $120 million by this year, and BHS has made over $81 million of principal and interest payments.