The Internal Revenue Service is auditing the bond deal used to create Ascension Health, the U.S.'s largest not-for-profit healthcare system.
It's at least the second IRS audit of a bond transaction used to capitalize a new health system and more evidence of the agency's interest in not-for-profit acquisition financing.
The IRS wouldn't comment but did indicate in its notification to the issuing authority that the review is part of an "expanded compliance program," an Ascension Health written statement said.
Bankers at Salomon Smith Barney, underwriter on the deal, said more than 30 similar transactions have been used to capitalize new health systems, including such giants as Catholic Health East, Christus Health and Texas Health Resources.
St. Louis-based Ascension issued nearly $2.4 billion of debt to finance the November 1999 merger of its predecessors, Daughters of Charity National Health System in St. Louis and Sisters of St. Joseph Health System in Ann Arbor, Mich. Ascension voluntarily disclosed the audit to bondholders; it doesn't believe the audit will affect the bonds.
Since early 1999, the IRS has been reviewing a portion of a $580 million capitalization of MedStar Health, the 1998 merger of Medlantic Healthcare Group in Washington and Helix Health in Baltimore (See related story, below).
In both cases, the IRS wants to determine if the issues should have been classified as refundings, rather than new-money deals, according to sources involved in the transactions. A refunding is used to retire existing debt, usually to take advantage of lower interest rates. It is subject to strict guidelines regarding tax exemption.
Ascension Health and its advisers downplayed the audit, saying they believe the IRS is trying to learn more about the financing of new not-for-profit systems.
Asked why Ascension Health might have been picked, the system's chief financial officer, Jerry Widman, said it was "the largest healthcare bond financing ever done. . . . I'm sure they didn't do it alphabetically."
He added, "I'm comfortable that in the end, there will be a positive result."
George Wolf, a partner at San Francisco-based Orrick, Herrington & Sutcliffe, law firm and bond counsel in the Ascension deal, said the financing structure "has become pretty standard."
The IRS has said it would begin routine audits of municipal bond issues. Milton Wakschlag, chairman of the tax-exempt financing committee of the American Bar Association's tax section, said the agency might be looking at Ascension as a model for these types of deals.
The IRS has the power to yank bonds' tax-exempt status, but it's more likely to negotiate a financial settlement.
Ascension Health and its bankers spent last week reassuring investors. By coincidence, Widman was the opening speaker at an investor relations forum for not-for-profit healthcare in New York last week, organized by Salomon, the American Hospital Association and the Healthcare Financial Management Association.
Widman said investors at the event were "not jumping for joy" but complimented him on the system's decision to disclose the audit.
The bonds were issued in 13 series by 11 issuing authorities. Only one series--issued by the Michigan State Hospital Finance Authority--was selected for review. Wolf said all the series were structured similarly. "I think they're using the Michigan bonds as their entree to the whole transaction."