Michigan Hospital Sets Deal to Cut Floating-Rate Risks

CHICAGO — William Beaumont Hospital, one of Michigan’s largest health care systems, plans to enter the market next week with $273 million of fixed-rate new-money and refunding bonds that will continue the system’s efforts to reduce its floating-rate risks.

Beaumont is expected to price the bonds the week of Nov. 23. The bulk of the transaction will be used to ­refinance five series of variable-rate and ­­

auction-rate debt issued in 2001, 2003, and 2006 that total roughly $222 million, according to bond documents.

The finance team could revise the size of the refunding based on the market. The Royal Oak Hospital Finance Authority, which is issuing the debt on Beaumont’s behalf, has authorized the system to issue up to $305 million.

The transaction will include $36 million of new money that will be used to finance a series of projects at Beaumont’s hospitals in Royal Oak and Troy.

Morgan Stanley and Bank of ­America Merrill Lynch are ­underwriters on the deal. Miller, ­Canfield, ­Paddock and Stone PLC is bond counsel, and Illinois-based Kaufman Hall & Associates Inc. is financial adviser.

After suffering an operating loss of nearly $30 million and a round of downgrades from all three rating agencies in 2008, Beaumont has so far this year reported an increase in its operating income and revenue.

The system opted to scale back capital plans last year after credit analysts warned additional debt could strain an already-weak balance sheet.

This year, management announced it would move to reduce the risk in its debt portfolio by refinancing its variable-rate demand bonds and auction-rate securities into long-term, fixed-rate bonds and terminating a number of interest rate swaps associated with the variable-rate debt.

Beaumont saw a 28% spike in its interest rate costs in 2008 stemming from the collapse of the ARS market and other disruptions in the market that drove up interest rates on its variable-rate debt. 

In October, Beaumont’s management said it would evaluate strategies for its remaining ARS and could consider the possibility of a privately negotiated purchase of the securities or a tender to repurchase all or a portion of the debt.

The upcoming sale is the system’s third transaction of the year. In January it issued $393 million of fixed-rate bonds in rates that range from 6.25% to 8.25%.

Proceeds from the January transaction were used to refund $128 million of auction-rate securities, bringing the system’s remaining outstanding ARS down to $207 million.

Another $128 million of variable-rate debt that was hedged with interest rate swaps was also refunded and the swaps terminated.

Beaumont operates three hospitals and a number of other clinics and facilities in southeast Michigan, an area where several large health care systems compete for patients. Beaumont leads the market, with a nearly 28% market share as of 2007.

While the bulk of the system’s inpatient facilities are located in areas with relatively strong economies, growing unemployment has led to a rise in the number of patients using Medicare or Medicaid and a decline in the number of patients with higher-paying private insurance policies. 

Fitch Ratings rates the credit A with a negative outlook. Moody’s Investors Service rates it A1 with a negative outlook. Standard & Poor’s rates it A with a stable outlook.

For reprint and licensing requests for this article, click here.
Healthcare industry Michigan
MORE FROM BOND BUYER