The words "tender offer" usually apply to the corporate world, where a suitor seizes a company by offering a favorable bid to stockholders. Seldom does the term slip from the tongues of not-for-profit executives.
But in an example of how not-for-profits are expanding their arsenal of financial strategies, two healthcare systems recently used tender offers to bondholders to restructure their debt.
Both systems, Novi, Mich.-based Trinity Health and Saint Peter's University Hospital in New Brunswick, N.J., made a strong pitch to investors and sweetened the pot by paying premium prices to buy back the bonds. Hospitals generally don't consider such measures in good financial times, except under extraordinary circumstances such as a change in tax-exempt status.
But bankers in both deals expect to handle more voluntary tender offers by hospitals.
"Nowadays, all hospitals are looking at ways to improve their cash flow and get a more manageable debt-service schedule," says Bonnie Siegal, senior vice president of investment banking at First Albany Corp., based in Albany, N.Y., senior managing underwriter for the Saint Peter's deal. "This is one way that a hospital can make (itself) more viable."
The two systems had vastly different objectives and strategies.
Trinity Health, a 46-hospital system, needed to consolidate the debt of its two predecessor organizations after its May 1 merger. In the past, new systems used acquisition financing to unify their credit structures, but those deals have ceased pending an Internal Revenue Service investigation regarding their tax-exempt status. It's unclear when the IRS will weigh in (Aug. 14, p. 6).
Instead, Trinity opted to retire the bonds by offering to buy them back at prices bid by the bondholders, financing the deal with new variable-rate debt.
The offer, completed Nov. 17, was complex, involving issues from seven states with about 300 different maturities, says Jim Andrews, a vice president in healthcare at Goldman, Sachs & Co., which was co-underwriter with Morgan Stanley Dean Witter.
The system and its bankers ranked each bid and accepted the most economical, Andrews says. In the end, Trinity retired $133 million of debt, exceeding its $125 million goal.
Meanwhile, Saint Peter's, a 516-bed teaching hospital, was saddled with high debt-service expenses for a 1993 bond issue, which was structured when New Jersey was a rate-regulated state that reimbursed hospitals for capital costs. High principal payments became a burden after rate regulation ended and revenue pressures from the Balanced Budget Act of 1997 hit the industry, says hospital Chief Financial Officer John Calandriello.
Like the Trinity debt, the Saint Peter's bonds didn't qualify for advance refunding, a simpler form of refinancing in which an escrow is established to repay bondholders. Tax law caps the number of times tax-exempt bonds may be advance refunded, and both systems' issues had hit the limit.
But unlike Trinity, which was pitching mainly to institutional investors, Saint Peter's had 93% of its bonds in the hands of individuals. That required a simpler offering in which the hospital agreed to pay a flat 2.4% cash premium over the bonds' face value, or to replace the bonds with other AAA-insured New Jersey debt that carries slightly higher interest rates.
Saint Peter's hired an agency to contact bondholders with offering materials, which included question-and-answer sheets and personal appeals from the hospital board's chairman and president.
For Saint Peter's, the tender offer allowed the system to delay debt service and increase the technology it needs to remain a leader in areas such as noninvasive surgery and radiation oncology, Calandriello says.
After a new $71 million bond issue set for this month, the hospital's total debt service in 2002 will be reduced to $6.5 million from $8 million, even with the addition of new debt, Calandriello says.
Trinity CFO Jim Combes said the tender offer enabled Trinity to satisfy credit-rating agencies that it had achieved a unified credit structure, which was a factor in achieving an AA rating.
Combes says acquisition financing would have been easier and cost about $3.3 million less, but he was pleased with the tender offer as a surrogate, calling it "much easier than I thought." He says Trinity plans at least one more tender offer in the next two years.
Combes also expects other merging hospital systems to use the strategy as long as there are legal questions about acquisition financing. "I think it's a neat approach," he adds.