CHICAGO - The Illinois Finance Authority expects OSF Healthcare System and Rush University Medical Center to soon join in on the slow trickle of struggling health care borrowers testing market interest in their sector's debt so far this year.
Rush is aiming to enter the market next week with about $112 million of fixed-rate bonds. It would mark the IFA's first fixed-rate issue from a health care provider since Advocate Health Care Network sold a fixed-rate transaction in late November, said the IFA's Pamela Lenane, a program administrator.
Rush last fall initially received authorization from the IFA to sell up to $375 million to restructure existing bonds and raise funds to finance the second phase of a 12-year, $900 million reconstruction of its main campus on Chicago's west side and projects at its Rush-Copley Memorial Hospital in Aurora.
Given the market turmoil, Rush and its finance team broke the deal into smaller tranches. The system sold $50 million of new money last month using a variable-rate structure.
The sale next week will retire a line of credit the hospital system tapped to redeem a 2006 variable-rate issue that shot up in price and suffered failed remarketings after its insurer, MBIA Insurance Corp., was downgraded. A small $8 million piece is new money.
"The deal could be up-sized, depending on market access," said one official working on the transaction. "Right now it's a matter of getting done the smaller amount you need to and then coming back with the balance. It's still far from a healthy market, so borrowers have to prioritize."
Morgan Stanley is the senior manager with JPMorgan, William Blair & Co., Citi, Loop Capital Markets LLC, Cabrera Capital Markets LLC, and Raymond James & Associates Inc. also on the underwriting team. Chapman and Cutler LLP is bond counsel.
Ahead of the sale, Fitch Ratings and Standard & Poor's affirmed Rush's A-minus. Moody's Investors Service affirmed its A3 with a positive outlook. Fitch wrote that the credit is supported by a "solid financial profile, the regional draw of patients due to RUMC's reputation and clinical excellence, and strong fundraising and philanthropic support."
Moody's said the system benefits from a track record of profitability since fiscal 2005, good growth levels in inpatient and surgical volume, an overall reduction in floating-rate exposure, and city approval for $75 million in tax-increment financing.
Its challenges include increasing debt, a competitive marketplace, and a recent decline in liquidity due to market turmoil and capital spending. The system faces swap termination costs currently estimated at $25.5 million and is continuing to review the timing of the termination.
Peoria-based OSF is planning to issue by late next month $275 million of fixed- and variable-rate bonds to refund auction-rate bonds insured by Financial Security Assurance. The IFA last week authorized the system to sell up to $650 million.
The higher amount was approved to give the system room to refund another $140 million of FSA-insured variable-rate bonds if needed and to include $75 million in new money if needed. The authorization also would allow OSF to include possible swap termination fees that would be incurred if FSA is further downgraded.
"We wanted to build in the flexibility to do those things if needed," said Anne Donahoe, financial adviser to the system.
Merrill Lynch & Co. is the underwriter, Jones Day is bond counsel, and independent financial adviser Donahoe is adviser. OFS carries ratings of A2 from Moody's and an A from Fitch and Standard & Poor's.
While borrowers were frozen out of the fixed-rate market last month, the IFA did see a handful of its pending health care deals completed in the floating-rate market, including Rockford Health System, Southern Illinois Healthcare, and NorthShore University HealthSystem.
Last week, the highly rated Northwestern Memorial Hospital sold $200 million of variable-rate debt after ditching its planned fixed-rate structure last month.
"Fixed rates were spiking and for a credit of their caliber, it was deemed to be too high," said Northwestern's financial adviser Kenneth Kaufman, of Kaufman Hall & Associates Inc.
JPMorgan Chase Bank NA provided a liquidity facility and served as the lead underwriter. Citi and Loop Capital also were on the deal.
Northwestern will use the proceeds to pay down a bank line of credit that retired insured variable-rate bonds and auction-rate securities and to restructure other auction-rate and floating-rate debt. The system carries ratings in the double-A category due to its prominent clinical reputation, excellent liquidity of $1.2 billion, and strong financial management.
Kaufman said borrowers continue to remain concerned over investor demand and are watching the credit spreads to decide whether it's worth borrowing now. While he has seen a handful of fixed-rate health care borrowers get deals done this week, he noted that none fall in the triple-B category, reflecting investor demands for yield on riskier credits.
