A small Tennessee hospital this week will go to the bond market with an unusual deal in which the nation's largest hospital chain is guaranteeing a portion of its tax-exempt debt.
In the past couple of years, Jesse Holman Jones Hospital in Springfield tried twice to sell tax-exempt bonds to finance a $30 million replacement facility. Both times, the effort "failed miserably," said James M. Faulkner, administrator of 115-bed facility, which is 20 miles north of Nashville.
However, he believes the third time might be the charm, especially with Louisville, Ky.-based Columbia/HCA Healthcare Corp. sweetening the deal.
Columbia wants to add the hospital to its local network and gain patient referrals from the hospital.
The 196-hospital chain is guaranteeing $8 million of Jesse Holman Jones' $30 million issue. For bondholders, that means that if the hospital fails, Columbia/HCA will cover at least 27 cents on every dollar invested.
"It's difficult for a freestanding hospital to go out and borrow $30 million," said Joey Jacobs, president of the Columbia/HCA's Tennessee division, about Jesse Holman Jones. "We just add credibility."
The hospital's credit profile was risky because it had never issued bonds before and it was a stand-alone facility, he said.
"We could have sold bonds at 20% interest, but we couldn't accept the philosophy of sell at any cost," Mr. Faulkner said. With the Columbia/HCA guarantee, he expects the bonds to be priced at 7.75%. The bonds will not be rated.
In 1993, the hospital reported a $454,550 profit on $26 million in revenues. The previous year, Jesse Holman Jones had lost $428,600 on $23 million in revenues.
A bond analyst at Moody's, a New York-based rating service, said he had never heard of an arrangement in which an investor-owned hospital chain guaranteed bonds for a hospital it doesn't own. A spokesman for Quorum, a Nashville, Tenn.-based company that manages 258 hospitals, said it does not guarantee bonds for the tax-exempt hospitals it manages.
Mr. Faulkner said he's aware that the deal is unique, but that it's a way for the former county hospital to rebuild and remain independent.
"Every healthcare system in Nashville was approaching them, and we won that process," Columbia/HCA's Mr. Jacobs said.
However, most of the other suitors wanted to buy the hospital, said Mr. Faulkner.
By striking a deal with Columbia/HCA, Jesse Holman Jones becomes a part of the Columbia/HCA network in Nashville. That network includesthree hospitals, including one of the city's largest, 645-bed Centennial Medical Center. In addition, it includes HealthWise of America, which operates an HMO in the seven-county area and has a provider contract with the Columbia/HCA network. HealthWise also operates an HMO in Bowling Green, Ky., a community just north of Springfield where Columbia/HCA owns 211-bed Greenview Hospital.
As part of the deal, Columbia/HCA has two non-voting members on Jesse Holman Jones' 11-member board.