Regional News

Wisconsin OKs Three Health Care Deals Worth $352M to Exit ARS

CHICAGO - The Wisconsin Health and Educational Facilities Authority yesterday approved three transactions tied to borrowers' efforts to exit the auction-rate market. They include a $152 million deal from Children's Hospital and Health System of Wisconsin Inc. that will mark the second use in the tax-exempt market of a floating-rate structure promoted by Goldman, Sachs & Co.

The other deals signed off on by the WHEFA board pave the way for the Medical College of Wisconsin Inc.'s $80 million fixed-rate issue slated for sale today. It's being underwritten by Goldman and Robert W. Baird & Co.ProHealth Care Inc.'s sale next month of $120 million of variable-rate demand bonds also won approval. Piper Jaffray & Co. is the underwriter with M&I Bank providing a letter of credit.

The medical college put off until a future meeting a request for board approval for the $70 million floating-rate piece of its new-money and refunding issue as it considers structural options. The college's situation is similar to Children's, which last month sought approval for the $103 million fixed-rate tranche of its new-money and refunding issue that priced June 25, while officials held off until the board meeting yesterday to present its variable-rate piece for approval.

"They both were looking at their alternatives," said WHEFA executive director Lawrence Nines. He noted the complexity of crafting variable-rate structures and the expense of liquidity given the market turmoil and mass exodus from the auction-rate market after its collapse earlier this year amid the credit crunch. When deals are brought before the board for final approval all members of the financing team, and credit enhancement must be in place, he added.

Children's, which serves as the children's academic training center for the Medical College, will use proceeds of its fixed- and floating-rate sales to refund its auction-rate bonds that sold in 2004 and 2007 and to fund some ongoing capital projects.

The floating-rate tranche is expected to price late this month. The hospital is using a product known as X-Tenders that Goldman introduced to the tax-exempt market with a $105 million tranche that was part of a University of Pittsburgh Medical Center deal in 2005. The product was adapted from a corporate structure used by Goldman.

The bonds are initially priced off the Securities Industry and Financial Markets Association index. The bonds will be remarketed monthly - after an initial 13-month period - and are subject to mandatory tender at the purchase price of 100% of the principal amount.

The mandatory tender makes the bonds eligible for purchase by money market funds. Bondholders can elect to extend by retaining bonds 12 months before their mandatory tender date and will receive notice of the upcoming deadlines.

If investors retain the bonds at that time, the mandatory tender date and corresponding retention date will be extended one more month. The process is repeated on a monthly basis as long as bondholders retain the debt. If a bondholder opts not to retain the debt, the issuer will pay the investor on the mandatory tender date. If bonds are not retained, another buyer can be sought within 15 days, the mode on the bonds can be converted or the bonds refinanced, the borrower can use its own liquidity to support the tender, or increase the spread to SIFMA to encourage retention.

In the event that a bondholder elects not to hold on to their bonds, the borrower has 12 months before the mandatory tender date in which to raise the funds needed to pay the purchase price, so no liquidity facility is needed.

The product is geared towards higher rated credits that are not viewed as liquidity risks. Moody's Investors Service said it believes CHHS can absorb the potential risk of non-retention because of its "internal liquidity sources, well-planned monitoring, and the flexible structure of the bonds," given the system's $466 million of unrestricted cash.

As part of its restructuring, the hospital will terminate a swap with counterparty Goldman Sachs Mitsui Marine Derivatives Products LP on about $60 million of outstanding floating-rate debt with a termination payment of between $1 million and $2 million.

Ahead of the sale, Moody's affirmed its Aa3 rating on Children's and Standard & Poor's affirmed its AA-minus on what will be a total of $283 million of debt.

The credit benefits from strong financials, including unrestricted investments of $466 million in fiscal 2007, manageable debt levels with operating revenues of more than $500 million, operating income of $33 million, and more than 14,000 admissions annually.

Its state market share of pediatric services is 24.4% and growing due to a strong referral network and the hospital enjoys a close affiliation with most pediatricians in southeast Wisconsin, according to Moody's. Its challenges include a payor mix that is increasingly reliant on the state's Medicaid program for 41.5% of revenues.

The hospital also has significant growth plans to meet demand with financing coming from a mix of cash, philanthropic support, and borrowing that has increased debt by 50%. The hospital expects to complete construction of a new tower to house the Herma Heart Center with 216 beds next year. The hospital has invested $228 million in recent years and is evaluating plans to potentially build a new tower, ambulatory building, and research facility.

"The stable outlook reflects CHHS' solid business position and good operating performance through fiscal 2007, and we expect that CHHS will continue to generate operating performance similar to recent years' levels, given the geographic expansion and continued investment in physician growth," Standard & Poor's analyst Susie Desai wrote.

On the Medical College's deal, about $47 million of the issuance will provide new money to fund various projects, including the completion of a biomedical research building that opened last year. The remainder will go to retire interim financings that eliminated its auction-rate debt that had seen increased rates since February with a high of between 8% and 15.9% on various series, according to chief financial officer Margie Spencer, although the hospital did not experience a failed auction.

In April, the college converted its auction-rate debt to a flexible-rate mode and purchased the debt with funds raised under a collateralized repurchase agreement that matures in October and a line of credit.

As part of its financing, the college intends to leave in place a swap with Goldman Sachs Mitsui Marine Derivative Products on $66.4 million, but will substitute an insurance policy from Assured Guaranty Corp. for one from MBIA Insurance Corp.

The hospital is still weighing its options on a variable-rate structure, including whether to use insurance from Assured, and a letter of credit or other liquidity facility. A fixed-rate structure is also on the table.

"Given the market, we wanted to pause and look at all our options," Spencer said.

Moody's and Standard & Poor's affirmed the college's A1 and A-plus credit, respectively, on about $215 million of debt. The college's credit benefits from its position as one of just two medical schools in the state and its location in the Milwaukee Regional Medical Center, manageable debt levels, good financial operations with strong cash levels and investments, including a permanently restricted endowment, and a diverse mix of revenue sources.

Total financial resources stood at $973 million at June 30, 2007. Medical school applications have been on the rise, reaching nearly 6,700 last fall, with selectivity improving to 6.8% from 12% five years earlier. The school has a student population of 1,149.

Factors that offset some of its strengths include the single focus of the institution as a freestanding, private medical school that is not part of a hospital or university, competition from other providers, and reduced research funding from the National Institutes of Health.



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