The financing authority for the University of Kansas Health System is going to the bond market to raise $190.2 million to add extra floors to a patient tower at the main campus and repay the debt of recently acquired Hays Medical Center.
KU decided to add four floors to its original eight-floor north patient tower construction project, citing strong patient demand at the 633-bed main hospital, Fitch Ratings said. Fitch rated the bond issue a strong AA-.
About $120 million of the bond issue funds will be used for the extra floors. Another $30 million will go towards other system capital needs, Fitch said.
The last approximately $40 million is expected to go toward paying off the outstanding debt at Hays Medical Center, which KU Health acquired in January and is consolidating into its system.
With Federal Reserve benchmark interest rates still near historic lows at 1%, hospitals remain active in the bond markets to raise capital for expansion and pay off debt and credit lines with higher interest rates.
Catholic-sponsored SSM Health, with its 20 hospitals, is set to offer $500 million in new debt, the hospital company disclosed Wednesday. About $200 million of the proceeds will be used to repay outstanding commercial paper and the other $300 million for as-yet undisclosed corporate purposes, the St. Louis-based company said in a prospectus.
In November, investor-owned Tenet Healthcare "upsized" a proposed $500 million bond offering to $750 million to take advantage of strong demand for its offering.
KU and Hays are running strong operating surpluses, according to Fitch.
Hays Medical Center, a 207-bed hospital located 260 miles from Kansas City in Hays, Kan., pulls in 65% of the patient volume in its market area and has averaged a strong 4.2% operating margin over the past two years, Fitch said.
The hospital will contribute about $200 million in revenue to KU Health on top of the $1.73 billion the system posted in its fiscal 2016.
Though KU Health's operating margin in the first half of fiscal 2017 dipped to $39.7 million, or a 3.9% operating margin compared to 7.1% in fiscal 2016, the decline is largely attributable to the lower margins posted by a 700-plus physician group brought under a single system umbrella last year from separate physician groups, Fitch said.
The plan to put four additional floors above the eight-story Cambridge North Tower will allow KU Health to add 32 beds to the 92 inpatient beds and 12 operating rooms on the initial eight floors, Fitch said.
The system will build out one of the four new floors initially and leave three as shells to be outfitted as demand requires.
Fitch estimated the total project at $370 million, with a big portion paid for as part of a 2015 bond issue.