Newly formed Trinity Health has decided to postpone a $388 million bond offering, providing evidence that Internal Revenue Service vigilance has chilled the healthcare bond market.
Meanwhile another new system, West Penn Allegheny in Pittsburgh, has structured its upcoming bond issue to sidestep potential IRS concerns.
The Trinity Health deal would have consolidated debt held by Farmington Hills, Mich.-based Mercy Health Services and South Bend, Ind.-based Holy Cross Health System, which merged May 1. A pricing date of May 24 was postponed until this week; now it has been put off indefinitely.
Trinity Health spokesman Stephen Shivinsky said the 44-hospital system based in Novi, Mich., wants to avoid a potential audit. "We're trying to create this big new system--that's the last thing we need right now," he said.
The IRS is reviewing at least four outstanding bond offerings that were used to cement not-for-profit health system mergers, known as acquisition financing, and has indicated it will examine others. The agency wants to know if some of the debt in those deals should be classified as a refunding, which is allowed only once for tax-exempt bonds.
If the IRS finds the deals improperly included debt that had previously been refunded, the agency could declare the debt taxable or require the systems to pay a settlement.
Trinity Health, like other new health systems, had hoped to reduce its capital costs by restructuring its debt, Shivinsky said, but he declined to give a specific amount. He said the system is exploring other financing options.
Since the IRS audits were disclosed over the last few months, demand has cooled for acquisition financing debt, market observers said.
Systems that have acknowledged IRS audits are Ascension Health in St. Louis; MedStar in Columbia, Md.; Christus Health in Irving, Texas; and Texas Health Resources in Irving (June 5, p. 2).
"There are certain bond funds that have indicated they will shy away from acquisition financing," said Tom Whalen, a director at Salomon Smith Barney in New York. The firm is the lead underwriter for West Penn Allegheny's $429.5 million offering, which is scheduled to proceed in mid to late July (See related story, p. 26).
West Penn Allegheny includes six hospitals consolidated from Pittsburgh-based Western Pennsylvania Healthcare System and the Pittsburgh affiliates of the bankrupt Allegheny Health and Educational Research Foundation.
The West Penn offering will not refund approximately $96 million of outstanding debt that has previously been refunded, which should clear it of IRS concerns, Whalen said.
Of that outstanding debt, $24.4 million issued by Western Pennsylvania Hospital will continue to be insured by MBIA Insurance Co. under new terms. Negotiations are under way with the owners of approximately $72 million in bonds that were issued by the Forbes Health System; some of those bonds may be purchased with proceeds of the new issue.
Whalen said the structure will have a "slightly negative impact" on cash flow in the early years. One of the main goals of the financing is to eliminate principal payments for the next five years, he said.
Whalen added that the system may end up with slightly more debt service.
Another, costlier option for some systems may to issue taxable debt. Oak Brook, Ill.-based Advocate Health Care is considering selling as taxable debt most of an upcoming $170 million bond issue in connection with its merger with Chicago-based Illinois Masonic Medical Center, according to a report late last week in The Bond Buyer.