WASHINGTON - The Charleston Area Medical Center, West Virginia's largest medical provider, today will issue $178 million of revenue bonds after the center received a negative outlook from Moody's Investors Service.
The deal will raise new money and refund variable-rate bonds issued for the 961-bed center in 2002. It will also finance a swap termination associated with the 2002 bonds to free up collateral hat had posted by CAMC. The bonds also will be used to fund a debt service reserve fund.
Moody's, which rates the current deal A2, said it revised the outlook to negative from stable because of declining cash flow and the increase in its debt burden that will result from this deal. The leverage CAMC will carry after this deal has heightened its risk profile, analysts said.
Its situation reflects the troubles faced by many issuers in nonprofit health care amid the recession. In April, Moody's released a report citing weaker demand, declining cash flows, and investment losses as the main problems at hospitals this year. Moody's, Standard & Poor's and Fitch Ratings have had a negative outlook on the health care sector for several months.
The medical center's "liquidity had declined considerably because of the volatility in the equity market," said Beth Wexler, Moody's lead analyst on the deal. "But there is evidence in the interim period that suggests [CAMC] had gotten their hands around some of the challenges with operating performance."
The challenges are not specific to the hospital, Wexler added. "It's pretty much what we're seeing throughout" the sector, she said.
Ratings from other agencies for CAMC were not available at press time.
The amount of the debt refunding and swap termination payment will be determined at pricing, said Darrel Flannel, managing director at Merrill Lynch & Co., which is underwriting the deal with BB&T Capital Markets.
CAMC has an outstanding notional amount of swaps totaling $468.8 million, Moody's said. Merrill is the counterparty in each transaction. As of Aug. 12, the hospital system had a liability of $24.9 million in mark-to-market value on the swaps and had posted $1.37 million in collateral. It could terminate up to $156.9 million of outstanding swap exposure with this deal, Moody's said. Because it will reduce its swap exposure with the deal, the threat of additional collateral requirements has declined, Flannel said.
The West Virginia Hospital Finance Authority, the state's largest issuer in 2008, will issue the bonds, which are tentatively set to mature between one and 28 years. It has issued debt for nine health care providers since 2000 with more than half of the deals as variable rate.
CAMC's move to exit the variable-rate market follows a trend away from such deals this year. Though variable-rate issuance has not vanished altogether, issuers are looking to escape some of the risks associated with these deals, said Mark T. Melio, founder of Melio & Co., a financial adviser and broker-dealer for tax-exempt health care issuers who is not involved in the CAMC deal.
"More and more health care systems are issuing fixed-rate debt to lock in favorable interest rates," Melio said, adding that such deals avoid bank liquidity risks associated with a letter of credit provider. "A lot of boards of trustees are looking for their institutions to eliminate these risks."
Swap terminations can be a favorable move for health care issuers, Melio said, because it can free up any collateral posted for swaps that have a negative value for the issuer.
West Virginia's stringent certificate of need program will help CAMC protect its market share, Wexler said. The CON program requires an independent board to approve any hospital expansion projects. The program is designed to limit inflated costs passed on to patients, but it can also preserve a provider's market position.
At CAMC, the state's strict CON program "is a positive" because of its established market presence, Wexler said. "It really does protect their position," she said.
Spilman Thomas & Battle PLLC will serve as bond counsel. The underwriters will be represented by Jones Day. Kaufman Hall & Associates will serve as financial adviser.
