Creditors object to fast-track SynCardia bankruptcy sale

Tucson-based artificial heart maker SynCardia Systems is pushing for a quick sale of its assets in bankruptcy court so it can avoid collapse and emerge as a new, recapitalized company.

But a committee representing unsecured creditors and the U.S. trustee appointed to oversee the bankruptcy case want to put the brakes on the process.

The unsecured creditors — including trade creditors and those who lent the company money without collateral — stand to lose everything in the case, as SynCardia has estimated there will be no funds left to pay them.

Any delay would be damaging, SynCardia says, partly because hospitals already are balking at implanting its artificial hearts as they’re uncertain about continued support because of the bankruptcy.

The company filed for Chapter 11 bankruptcy reorganization on July 1 in Delaware, proposing the sale of all its assets to its senior creditor in an effort to save the company.

An affiliate of Versa Capital purchased SynCardia’s senior debt at a discount in June and has bid $19 million of that debt in a so-called credit bid, plus $150,000 in cash and other considerations, to buy the company, subject to higher and better offers.

Known as a “stalking horse” bid, such prearranged deals are intended to attract better offers, or if better others aren’t made, to help expedite a company’s sale and emergence from bankruptcy.

Versa through its affiliate Sindex SSI Lending LLC has also agreed to provide so-called debtor-in-possession financing while SynCardia wends its way through the bankruptcy process.

At SynCardia’s request, a bankruptcy judge has set an omnibus hearing for Monday, Aug. 1, on a variety of initial motions to keep SynCardia going, as well as approval of its plan to auction the company’s assets in a process culminating with a sale hearing on Aug 22.

But attorneys for the unsecured creditors said the short timeline SynCardia has requested to approve the operational motions and bankruptcy sale plan leaves insufficient time for creditors to study the deal or reach some kind of settlement.

The creditor’s committee also contended the process proposed by SynCardia is rigged in favor of Sindex, which as part of the deal would be awarded a “breakup fee” of 3 percent of the purchase price, or $570,000, if the deal is not consummated, along with an expense reimbursement of $1.75 million and other special rights.

“This case is an example of a secured creditor, who purchased debt immediately prior to the petition date for a fraction of the face amount, attempting to control the Chapter 11 process for its sole benefit and to the detriment of other estate creditors who, as a result, are expected to receive no value,” the unsecured creditors said in a motion seeking to delay Monday’s hearing.

Sindex paid SynCardia senior creditor SWK Funding $7.2 million for debt totaling about $22 million, according to filings with the U.S. Securities and Exchange Commission.

As of late Friday, the judge in the case had not ruled on the committee’s motion to put off Monday’s hearing.

Meanwhile, U.S. Trustee Andrew Vara has objected to SynCardia’s expedited bankruptcy auction plan, on grounds that the time frame is too short to attract possibly higher bids and that Sindex is not entitled to break-up fees and other compensation under bankruptcy law.

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But SynCardia says it must meet milestones in the timeframe proposed and tentatively approved by the court, or the deal is off, and it won’t have the money to continue operations.

If the court fails to meet Monday and approve the operational and administrative orders including the bankruptcy auction procedures, SynCardia would miss a deadline in its deal with Sindex to hold the asset auction hearing by Aug. 22, SynCardia said.

That would push SynCardia into default on its debtor financing deal with Sindex, and SynCardia “could be forced into an immediate liquidation,” the company said in opposing a motion by the unsecured creditors to hold an emergency telephonic hearing on delaying the process.

As it is, SynCardia said that since the bankruptcy filing on July 1, the number of implants of its artificial hearts are down to a 27-month low.

“Hospitals and centers that rely on the Debtor’s product have concerns over whether SynCardia (or any buyer) will be able to continue to service the Debtor’s drivers — that power the implanted (Total Artificial Hearts) — as a result of the bankruptcy filing,” SynCardia said.

SynCardia officials have declined to discuss specifics of the case but issued a statement saying the company has continued providing service to hospitals and their patients.

“Our first priority is always the relationship with our hospitals and the care of their many patients,” said Donald Isaacs, SynCardia’s vice president of communications. “SynCardia Total Artificial Hearts, drivers and service are on schedule and our clinical support specialists are at SynCardia Certified Centers for implants, ongoing patient care and hospital staff training.”

SynCardia’s Total Artificial Heart — developed from the original Jarvik-7 heart — is the only total heart replacement approved as a bridge to transplant by the FDA.

As of the end of February, 1,568 SynCardia artificial hearts has been implanted at 120 medical centers worldwide.

Since 2012, SynCardia has averaged 141 implants of its hearts annually, and about 50 patients are currently awaiting transplants with SynCardia Total Artificial Hearts, the company says.

In its bankruptcy filings, SynCardia says it has assets totaling about $17 million, against total liabilities of $53.7 million.

Those liabilities include about $22 million in senior secured debt now owned by Sindex, and $11.6 million in nonpriority, unsecured claims that stand to go unpaid.

Among the unsecured debts listed by the company is $312,000 owed to the former University Medical Center. According to bankruptcy and securities filings, the debt consists of a note, a form of debt instrument, given to UMC in exchange for certain assets in 2002.

SynCardia did not identify the specific assets acquired through the UMC note, and that information was not immediately available from the University of Arizona.

Besides the unsecured creditors, shareholders in the privately held SynCardia — including many local individual investors — stand to lose the entire value of their stock as a result of the bankruptcy.