Regional News

Chicago Children's Hospital Reborn

CHICAGO - One week after formally breaking ground on its replacement hospital, Children's Memorial Hospital in Chicago enters the market tomorrow with $380 million of fixed-rate new money bonds to help finance construction of a nearly $1 billion 288-bed facility.

Goldman, Sachs & Co. and Morgan Stanley are senior managers with Loop Capital Markets LLC and Cabrera Capital Markets LLC also serving on the underwriting team. Jones Day is bond counsel and Kaufman Hall & Associates Inc. is financial adviser. The bonds are being sold through the Illinois Finance Authority.

The fixed-rate deal includes a mix of serial and term maturities and is divided into two series, one for $210 million and another for $170 million with the triple-A rated Assured Guaranty Corp. providing coverage on the first tranche.

The hospital plans a sale of variable-rate debt in the coming weeks that will refund its roughly $185 million of floating-rate and auction-rate securities that sold in transactions between 1993 and 2004. The hospital intends to use about $2 million from the refunding and another $4 million in cash to cover the costs of termination payments on swaps tied to the debt being refunded, although the termination costs aren't final. JPMorgan Chase Bank NA will provide a letter of credit.

Members of the finance team were not available Friday to provide information on the additional costs incurred in recent months because of increasing rates on insured variable-rate debt or as a result of the collapse of the auction-rate market or on the savings associated with the refunding.

The hospital received its first stand-alone ratings recently and the two agencies asked for ratings providing sharply differing evaluations, with Fitch Ratings assigning a AA-minus and Standard & Poor's an A-minus. Moody's Investors Service was not asked to rate the deal.

Though investors now look more skeptically on insurance coverage given the steady stream of downgrades due to exposure to subprime-related securities and look now more closely on a credit's underlying strength, the insurance should help the deal because of the single A credit, said Thomas Spalding, portfolio manager at Nuveen Investments.

Assured, which is expanding its public finance business, is one of just two monolines whose credits are considered stable.

The double-A and insurance aside, Spalding added that the underlying credit benefits from Children's fundraising strength. "Children's is always going to trade a notch better because of its unlimited fundraising capability," Spalding said.

The new hospital is to be named the Ann & Robert Lurie Children's Hospital. Chicago philanthropist Ann Lurie last year announced a $100 million gift towards construction. The hospital's financing relies on a further mix of cash and donations and the hospital has pledges for about $350 million of a $600 million fundraising goal.

The hospital is relocating from its current site in the Lincoln Park neighborhood to a downtown site on the campus of Northwestern University's Feinberg School of Medicine and Northwestern Memorial Hospital's new Prentice Women's Hospital.

Founded in 1882, the hospital is cramped for space and in need of technological upgrades. The hospital, slated to open in 2012 with about 45% more space than its current facility, received all the necessary state regulatory and ChicagoCity Council zoning approvals needed, but the council's approval did not come without some controversy over concerns raised by neighbors in the congested area over parking and plans for a heliport.

The hospital lobbied for and won the heliport arguing that it's essential for a facility that treats critically ill children from around the country. While most of its 113,000 patients treated last year came from the Chicago area, over the last two years the hospital has treated children from 36 other states and 33 countries.

Fitch attributed the strong credit to Children's 15% market position, reputation, relationship with Northwestern and other balance sheet factors including unrestricted cash and investments of $484.5 million, representing 270% of long-term debt. Children's also benefits from $463 million of donor-restricted investments.

Factors that offset the credit's strengths include an increasing Medicaid patient mix amid a lower reimbursement environment, construction risk associated with the project and the increased debt load.

"The stable outlook reflects our expectation that Children's Memorial Hospital will maintain its solid balance sheet," wrote Standard & Poor's analyst Brian Williamson.



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