N.Y.C. Hospital Deals Debt Backed by FHA-Insured Mortgage

The Hospital for Special Surgery in New York City will begin a retail order period tomorrow for $85 million of bonds secured by a Federal Housing Administration-insured mortgage.

The Dormitory Authority of the State of New York will issue the bonds on behalf of the nonprofit. Institutional sales are scheduled to begin on Wednesday.

Standard & Poor's rates the bonds AAA based on the insurance and debt service reserve. Moody's Investors Service rates them Aa2.

"All of our FHA transactions are rated strictly based upon the FHA insurance," said Standard & Poor's analyst Louis Louis. "We don't look at the hospital's ability to make payment at all."

The FHA, which is a part of the U.S. Department of Housing and Urban Development, is authorized to borrow from the U.S. Treasury to cover losses sustained by its general insurance fund.

With the strength of the federal government behind the mortgage insurer, Standard & Poor's also looks at the strength of the debt reserve in a worst-case scenario that assumes the bond will default immediately, according to Louis.

A default could create a period of time when the borrower wasn't making payments so the reserve needs to be able to cover payments during that time. The bonds will have a debt service reserve fund equal to one year of annual debt service plus one month of principal and interest on the mortgage loan.

The FHA is insuring the mortgage under its Section 241 program, which is available to hospitals that already have a Section 242 loan.

The Hospital for Special Surgery has two outstanding FHA mortgage loans from 1998 and 2005. The Section 242 program is available to acute-care hospitals that don't have FHA-insured financing.

Louis said over the past year they have seen an increase in FHA-insured transactions like this one.

"There has been a marked increase in interest by bankers and hospitals," John Whitehead, deputy director of the FHA's hospital insurance program, said in an e-mail.

The number of preliminary reviews the agency has performed for potential hospital applications grew to 43 in the fiscal year that ended Sept. 30 from nine applications during the same period in 2007 and 30 during the same period in 2008, Whitehead said.

In the past 13 months, the FHA issued insurance commitments totaling $1.3 billion to 13 hospitals and today it has 20 applications in the pipeline totaling $2.2 billion, according to Whitehouse.

Most of the additional increase in interest has been in FHA's Section 242 loan program, he said.

The hospital, which is located on the Upper East Side of Manhattan, plans to the use bond proceeds to finance an expansion and renovation project that will build three additional floors on top of one wing of the hospital's main building, increasing space at the facility by 60,000 square feet.

The bond proceeds will also finance the renovation of 60,000 square feet of existing space.

Merrill Lynch & Co. will lead manage the bondsl, which will be sold as serial and term bonds. Winston & Strawn LLP is bond counsel.

The hospital has $183.9 million of long-term debt outstanding.

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Healthcare industry New York
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