Oklahoma's Integris Health Selling $223M, Mostly to Cut VRDBs

DALLAS - Integris Health will reduce its level of variable-rate demand debt with next week's negotiated sale of $222.7 million of fixed-rate hospital system revenue and refunding bonds by Oklahoma Development Finance Authority.

Integris, which is the largest nonprofit health care provider in Oklahoma, will use $150 million of the proceeds to currently refund outstanding variable-rate debt issued in 1995 and 1998, according to Wentz Miller, chief financial officer at Integris.

The remaining $72.7 million in proceeds will help finance construction of a replacement hospital in Grove and renovations at the system's main facilities in Oklahoma City, Miller said.

Pricing of the bonds is set for July 16.

The deal is rated Aa3 by Moody's Investors Service and AA-minus by Standard & Poor's. With the sale, Integris will have $489 million of outstanding debt.

Underwriters are Goldman, Sachs & Co. and JPMorgan. Bond counsel is Kutak Rock Ltd. Integris' financial adviser is Kaufman, Hall & Associates Inc.

Miller said the health care system will use the proceeds from the sale to refund $32.7 million of outstanding variable-rate bonds issued in 1995 and refund $117.3 million of $118 million of outstanding VRDBs issued in 1998.

The 1995 and 1998 issues were insured by MBIA Insurance Corp., which recently lost its triple-A ratings.

"It's entirely an interest rate situation," Miller said. "We've seen a big spike in our costs with the decline in bond insurance ratings."

Miller said Integris has altered its financial strategy due to the increased interest costs that resulted from the market's reaction to the decline in bond insurance ratings. Currently, almost all of the system's $399 million of outstanding debt is synthetically fixed rate.

"The logical course for us is to fix our interest rate costs and take a more conservative approach to our capital structure," Miller said. "With this sale, we'll have roughly 50% of our debt in traditional fixed-rate bonds and 50% as variable-rate debt in a synthetically fixed mode."

Integris currently has a floating-to-fixed-rate swap, in a total notional amount of $152 million, that effectively hedges variable-rate bonds issued in 1998, 2007, and earlier this year. It has not been decided if that swap will remain effective after the refunding, according to Miller.

"I believe it will remain, but we're still analyzing it," he said, adding that the bonds will not be insured.

"We felt there was little to no economic benefit to bond insurance with this issue," Miller said. "With only a marginal benefit, we decided to reserve our insurance capacity for future issues. We want to keep our powder dry."

He said the hospital system's 10-year capital improvement plan, which is updated every year, calls for $300 million of additional debt to be issued in $100 million tranches every three years.

The new-money proceeds will finance the replacement of the current hospital in Grove, located in northeast Oklahoma. Built in 1964, the facility has been remodeled four times.

The hospital system will also upgrade several nursing floors at Integris Baptist, its flagship facility in Oklahoma City, and at Integris Southwest Hospital, also in Oklahoma City.

Renovated facilities are a key component to success in Oklahoma's competitive health care environment, Miller said.

"We've had eight consecutive years of record financial results," he said. "That's because we've stuck to our knitting and focused on the nuts and bolts. This money will be spent to make our nursing floors more efficient and bring them up to date."

Integris operates 13 hospitals in Oklahoma, with a total of 1,900 licensed beds. Total operating revenue in fiscal 2007 was $1.16 billion.

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