MBIA has insured a $66.6 million operating lease for Hackensack (N.J.) University Medical Center.
It's the first "off-balance-sheet" healthcare financing backed by the Armonk, N.Y.-based bond insurer and may be one of only a handful of such deals that have received any kind of mortgage debt insurance.
The lease agreement enabled Hackensack to finance a new, $79.6 million medical plaza without adding a penny of debt to its balance sheet. After rental and interest income, the project's cost is expected to total $74 million.
Hackensack recently completed a $166 million construction project, so adding more debt was a concern, though not a major one, said Bob Koller, Hackensack's vice president of corporate and facilities development.
By virtue of MBIA's guarantee, the medical plaza deal automatically earned AAA status. That top rating enabled Hackensack to save $4.3 million in interest costs over the life of the 32-year issue, said Emmeline Rocha-Sinha, managing director of MBIA's newly created enterprise finance unit, which insures deals in the healthcare, housing, student loan, investor-owned utility and corporate debt sectors.
Proceeds of the $66.6 million taxable note sale will be spent on development of a nine-story ambulatory-care facility that will house physicians' offices, an ambulatory surgery center, radiology and laboratory facilities, a patient and community education center, and the medical center's specialty institutes.
Hackensack also plans to build a new parking garage adjacent to one it has acquired, adding 788 spaces and doubling existing capacity.
Hackensack Medical Plaza, a for-profit, limited-liability corporation created for the sole purpose of facilitating this transaction and other related financings, funded 90% of the project through the sale of the taxable notes. The balance came from equity provided by Seavest Partners in White Plains, N.Y., which owns 78% of the corporation, and Essex Parking Co., a subsidiary of Hackensack University Medical Center's parent, which holds the remaining 22% stake.
The notes were privately placed with five insurance companies, said Peter G. Banta, a partner in the Hackensack-based law firm of Winne, Banta, Rizzi, Hetherington & Basralian, which represented Hackensack Medical Center. Banta said Merrill Lynch & Co. served as placement agent.
Hackensack Medical Plaza is leasing the land for the project from the medical center. When construction is completed in the first quarter of 1998, the land and facilities will be leased back to the medical center under a 32-year "triple net lease" agreement. The agreement is one of the reasons why MBIA felt comfortable about guaranteeing principal and interest payments.
"It basically means, come hell or high water, Hackensack (University) Medical Center has to make lease rental payments even if the building is no longer is existence," Rocha-Sinha said.
To further protect noteholders, MBIA asked for "cross-default provisions" to be added through a covenant on the lease agreement, she said. Under the covenant, if Hackensack were to default on its outstanding debt, that would trigger an "event of default" under the operating lease agreement. If Hackensack continued to make payments on the operating lease debt, MBIA would likely waive the default. If not, all the principal and interest payments on the notes would become due immediately.
Hackensack's credit strength and reputation also lended a level of comfort, Rocha-Sinha said. She said MBIA hopes to do many similar deals for comparably rated institutions.
Typically, off-balance-sheet financings have been backed by bank letters of credit, said David Varwig, senior managing director and chief executive officer of Citadel Group, a Chicago-based merchant banking and asset management firm that specializes in structuring such healthcare financings. While letters of credit are more expensive than insurance, banks have been more flexible, he said.
For example, Citadel's most recent deal, an $8.3 million medical office building for Riverside (Calif.) Community Hospital, is backed by a letter of credit from Comerica Bank.