N.Y.C. Hospital System Set to Sell $189M of VRDBs to Refinance ARS

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The New York CityHealth and Hospitals Corp. plans to sell $189 million of tax-exempt variable-rate demand bonds on Wednesday to refinance auction-rate securities sold in 2002.

With the sale of these bonds, HHC will exit the auction-rate market. The agency sold $271.2 million of fixed-rate bonds last week to convert a large portion of its ARS. HHC auctions began to fail in mid-February and have continued to fail ever since. Although interest rates did reset as high as 5.44% on one series in February, they have tended to reset below 4% in recent months, according to Bloomberg LP.

The VRDBs will be marketed in four series - Series 2008B and 2008C with a par of $50.5 million each and direct pay letters of credit from JPMorgan Chase Bank NA, and Series 2008D and 2008E with a par of $44 million each and direct pay letters of credit from TD Bank NA.

Hawkins Delafield & Wood LLP is bond counsel and Public Financial Management Inc. is financial adviser.

Morgan Stanley will underwrite and remarket Series B and D and Citi will underwrite and remarket Series C and E.

The HHC is a public benefit corporation that operates 11 acute-care hospitals in the city, as well as 80 community-based clinics, four nursing facilities, and six diagnostic centers. The agency has $927 million of debt outstanding.

Moody's Investors Service rates the credit A1 with stable outlook, a notch off New York City's general obligation rating. Moody's rates the bonds Aaa/VMIG-1 based on the rating of the LOCs and the underlying rating.

"The underlying rating is based on the city's obligation to restore HHC's capital reserve fund if it has to be drawn on in addition to implicit and explicit support provided by the city," said Moody's analyst Nick Samuels.

Earlier this month the New York Legislature cut a total of $501 million of Medicaid spending in the current fiscal year and the next fiscal year. Samuels said the overall impact of those cuts on the HHC remains to be seen.

Challenges at the agency, which operates the largest hospital system in the country, included having a high number of Medicaid and indigent patients, Samuels said.

"There can be uncertainty about intergovernmental funding sources, related to the patient mix," he said. "HHC itself has in the past had large operating losses."

Standard & Poor's upgraded HHC to A-plus with a stable outlook from A last month. Fitch Ratings upgraded the issuer to A with a stable outlook from A-minus earlier this month. Standard & Poor's rates these bonds AAA/A-1-plus based on a blend of the underlying rating and the LOCs' rating. Fitch rates the bonds AA-plus/F1-plus based on the underlying rating and the LOCs' rating.

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