N.J. to Back $265M Deal to Consolidate Newark Hospitals

New Jersey officials are working on a $265 million hospital deal that the state will guarantee because the transaction is intended to help consolidate health care facilities in Newark and pay down outstanding debt.

The New Jersey Health Care Facilities Financing Authority will issue the bonds, with maturities as long as 30 years, on behalf of Saint Michael's Medical Center. Morgan Stanley is the lead manager on the transaction and McManimon & Scotland LLC is bond counsel.

The state will back the bonds, not to exceed $265 million, as the transaction meets the eligibility requirements of the Hospital Asset Transformation Program. The 2000 law allows the HCFFA to refinance outstanding private nonprofit hospital debt with state-secured bonds if a provider is ceasing its acute-care operations. The authority had issued state-backed debt before, but only with state-owned health care facilities. The HCFFA approved the sale last week.

The $265 million bond deal will enable Catholic Health East, located in Pennsylvania, to buy three Newark health care facilities - Saint Michael's Hospital, Saint James Hospital, and Columbus Hospital - from Cathedral Healthcare System. Current plans call for Saint James and Columbus to close while officials revamp services at Saint Michael's to take on business from the other two hospitals.

"In order to satisfy certain conditions of the asset purchase agreement, the parties agree to close the acute-care facilities at Saint James Hospital and Columbus Hospital and renovate and expand the facilities at Saint Michael's to meet the increased demands of the service area population," according to HCFFA documents.

All three hospitals combined have been losing $3 million a month, according to John Grywalski, executive vice president and chief financial officer at Cathedral Healthcare.

The $265 million transaction will refund $92.3 million of outstanding debt, including 1991 Series A Columbus Hospital bonds, 1998 Cathedral Health Services bonds, and Series 2002 A, B, and C bonds that were privately placed, according to the HCFFA's 2006 audited financial statement.

Saint Michael's is a 337-bed teaching and research hospital that will now expand to take on emergency care services from Saint James, an acute-care facility, once that hospital closes. Columbus is also an acute-care institution and has 210 beds.

A New Jersey Commission on Rationalizing Health Care Resources report released in January stressed the state's overabundance of hospital beds, and named Newark in particular as one area that has excess beds.

"The analysis revealed that the state currently faces an oversupply of hospital beds that is manifest in every market area of the state, but most pronounced in the Hackensack, Ridgewood, and Paterson and the Newark/Jersey City market areas," according to the report.

In addition, the report pegged Newark and Jersey City's average hospital occupancy rate at 73%. While that ratio is better than the 2003 national average of 63% and slightly above the state's 72% average, it is below the "full occupancy" ratio of 80% to 85%, the range that experts use to determine a hospital's use, according to the report.

This will be the second private hospital bond deal to receive the state's guarantee. The authority issued $45.4 million of debt in March 2007 on behalf of St. Mary's Hospital in Passaic County, with roughly $30 million of the bonds backed by New Jersey's pledge, as that amount paid down outstanding St. Mary's debt and bonds that St. Mary's acquired from PBI Regional Medical Center in its takeover.

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