Let's make a debt deal

Huge debt deals being undertaken by two Catholic health systems have underscored how far credit markets have rebounded after seizing last year.

Catholic Health Initiatives, one of the largest U.S. not-for-profit health systems with 59 hospitals and $5.5 billion in assets, priced fixed-rate bonds totaling $1.1 billion last week. Catholic Healthcare West, which operates 38 hospitals in three states, is expected to go to market with another $919 million this week and in early November.

Meanwhile, a stream of other healthcare bond deals were priced or announced. Intermountain Healthcare, Salt Lake City, with 19 hospitals and one more under management, priced $250 million last week and scored a 5.1% yield on its 32-year bonds.

Other borrowers entering the market include Allina Health System, Minneapolis, with $229.8 million; Trinity Health, Novi, Mich., with $233 million; and Susquehanna Health System, Williamsport, Pa., $167.5 million.

Joseph Glenn, head of the healthcare group for Wells Fargo public finance investment banking, said tax-exempt healthcare borrowers have priced or announced $3 billion in deals in the past two weeks.

Investors that fled municipal bonds during the financial panic last fall returned early this year and have continued to pour money into the tax-exempt bond market. The steady influx of cash has met with a drain on bond supply as Congress created temporary relief for government borrowers caught in the credit crisis that has shifted some debt into the taxable market, gradually opening credit markets to healthcare borrowers unable or unwilling to borrow amid tighter and more expensive markets earlier in the year (Oct. 19, p. 6).

Interest rates have risen from lows in late September that prompted many borrowers to consider financing, Glenn said, but the cost of capital remains historically attractive.

Such a significant increase in supply gives investors more options and creates an incentive for borrowers to be among the first to enter the market, Glenn said.

That proved to be the case for Catholic Health Initiatives. Diane Albrecht, CHI's director of capital finance, said the system moved its pricing forward one week to stay ahead of the influx of healthcare borrowers. Denver-based CHI was already poised to enter the market because the system readied its bond issue to follow the audit of financial statements for the year that ended June 30, she said.

Linda MacDonald, vice president of treasury services for CHI, said that whether the rush to market paid off will become clear after healthcare borrowers come to market this week. The system's 30-year bonds scored yields of 4.95% in Kentucky and 5.25% in Colorado.

Improved market conditions have made borrowing more attractive, MacDonald said, but more significantly, the system's finances improved after the system cut workforce, supply and travel expenses, and boosted revenue. “We felt we have done very well in weathering the economic storm,” MacDonald said. Income from operations improved in the system's fourth quarter, to $152.5 million for the year on revenue of $8.6 billion, according to the system's audited financials. That's down 15% from 2008 but a sharp gain from the $26.1 million reported for the first nine months of the year in unaudited financials.

Investment losses swung the system's net income $469.5 million into the red for 2009 compared with the prior year's $76.6 million gain.

CHI has also moved to divest hospitals in Idaho, Missouri and Oregon, where acquiring Catholic providers hold greater market share, she said (Sept. 14, p. 10).

The bonds include $638 million in new debt, including $282 million in financing for Alegent Health, a nine-hospital system in Omaha, Neb. (See p. 20 for related story), and will convert $265 million in variable-rate-demand bonds and $93.4 million in auction-rate bonds into fixed-rate bonds, including so-called “put bonds,” which typically lock buyers in at fixed rates for three, five or seven years.

Once the deal is complete, CHI will have $827.3 million in municipal variable-rate-demand bonds and $550 million in taxable variable-rate debt. Of that, CHI has agreed to use its own cash to support $283.7 million.

Albrecht said converting the variable-rate-demand and auction-rate bonds will reduce the system's exposure to the debt vehicles, which have added risk to balance sheets since credit markets erupted in 2008.

The system has overhauled its capital spending, which is now released quarterly, rather than once a year; hinges on performance of its hospitals; and has put a priority on capital projects that improve operating margins, said MacDonald.

Catholic Healthcare West will use all of its upcoming bonds to refinance existing debt and scrapped plans to borrow another $250 million this fall, said analysts with Moody's Investors Service, in a report earlier this month.

Plans to spend $1 billion each of the next five years are under review and the system has budgeted capital spending of $665 million for fiscal 2010, which will require projects be delayed or prolonged, the report said. The system scaled back spending for the year that ended June 30 to $740 million.

Catholic Healthcare West did not respond to requests for comment.

CHW reported 2009 operating income of $261.1 million on revenue of about $9 billion, a 63% increase from the prior year's $160 million operating gain on of $8.4 billion. Investment losses left CHW with a net loss of $126.3 million for 2009, which ended June 30, compared with net income of $170 million in 2008.

The sizable deals follow on the early October financing by Cedars-Sinai Medical Center for $535 million. The 914-bed hospital in Los Angeles priced its 30-year bond at 5.05%.

Borrowers may find interest rates have retreated and spreads have narrowed from highs earlier in the year, but investors continue to demand more access to financial information and guarantees, such as mortgages or debt-service reserve funds, before lending.

And as more healthcare borrowers return to the market, investors can be more choosy and less tolerant of borrowers with poor financial disclosure or weak security to guarantee bonds, said Rob Yolland, a research analyst with Franklin Templeton.

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