CHICAGO - The Wauwatosa-based Children's Hospital of Wisconsin Inc. will reoffer $152.3 million of variable-rate debt as fixed-rate bonds today as the securities come up for their first remarketing cycle this week.
Goldman, Sachs & Co. and Robert W. Baird & Co. are underwriters and Quarles & Brady LLP is bond counsel.
The mode conversion is permitted under the bond documents for the original July 2008 transaction. Children's serves as the children's academic training center for the Medical College of Wisconsin and is the state's only acute-care hospital devoted to children's care. It used proceeds of the variable-rate $152 million 2008 B series and a $100 million fixed-rate Series A to refund auction-rate securities and to help pay for a major tower expansion project - the Series B are now being reoffered as fixed rate.
The hospital used a product known as X-Tenders that Goldman adapted from a corporate model and introduced to the tax-exempt market in 2005. The bonds were initially priced off the Securities Industry and Financial Markets Association index. After an initial 13-month period that ended this week, the bonds were to be remarketed monthly and included a mandatory tender at the purchase price of 100% of the principal amount. The mandatory tender made the bonds eligible for purchase by money market funds.
The 286-bed hospital, located just outside Milwaukee, was having difficulty in keeping and attracting investors in the structure, so it decided to shift to a fixed rate, said Lawrence Nines, executive director of the Wisconsin Health and Educational Facilities Authority, which acts as the conduit issuer for the hospital. Hospital officials could not immediately be reached to comment.
In the X-Tender mode, bondholders could elect to extend their holding by retaining bonds 12 months before their mandatory tender date. If investors retain the bonds at that time, the mandatory tender date and corresponding retention date would 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. The hospital tapped the structure with strong internal liquidity sources, including $466 million of unrestricted cash.
Children's carries a Aa3 rating from Moody's Investors Service and a AA-minus from Standard & Poor's on its $280 million of outstanding debt. In rating reports issued last year, analysts said the credit benefits from strong financials, 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. The hospital enjoys a close affiliation with most pediatricians in southeast Wisconsin. Its challenges include a payor mix that is increasingly reliant on the state's Medicaid program for 41.5% of revenues.
The hospital, founded in 1894, 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%.
