Cleveland Clinic 'century' bonds offer permanent capital

The Cleveland Clinic will become the first not-for-profit health system to finance its long-term projects with bonds that don't mature for 100 years.

The century bonds will allow the 11-hospital system to bring in a new group of investors looking to add longer-dated debt to their portfolios. They priced last week at par with all-in yield of 4.858%. About 40 investors participated in the offering, and the strong interest allowed the system to tighten pricing to 160 basis points over the 30-year treasury.

Steve Glass, the Cleveland Clinic's chief financial officer, said the bonds are “as close to permanent capital as you can get.”

Few organizations can promise that they'll be around in 100 years, so most issuers of century bonds have been colleges and universities, which can draw on their long histories and strong reputations to attract investors.

The Cleveland Clinic doesn't celebrate its centennial until 2021. But the system does have some advantages: a strong brand, highly specialized services and a powerhouse fundraising department, according to Moody's Investors Service. The bonds will represent 12% of its total debt, according to the agency, which has an Aa2 rating with a stable outlook on the system.

Glass said the system is looking to spend the proceeds on new partnerships (he declined to elaborate) and also has a number of projects in the works. He said the system is breaking ground on a new cancer center, plans to build a hospital on the west side of Cleveland and is expanding in Florida.

The taxable bonds are more likely to appeal to insurance companies, pension plans and endowments, said David Belmont, chief risk officer at the Commonfund, which manages nearly $25 billion in funds, mostly for not-for-profit clients.

Low interest rates also have made it more appealing for not-for-profit borrowers to issue taxable bonds rather than tax-exempt debt. “Particularly in this environment, they can issue at very low interest rates and really lock in those rates for a long time,” said Lisa Martin, an analyst at Moody's.

Follow Beth Kutscher on Twitter: @MHbkutscher