Deal in Focus

Ohio Hospital Goes Its Own Way

CHICAGO — Columbus, Ohio-based Nationwide Children’s Hospital today will begin pricing $100 million of fixed-rate revenue bonds to finance a chunk of its $800 million, six-year capital plan.

Co-senior managers PNC Capital Markets LLC and JPMorgan will begin taking ­retail orders on the bonds today before opening it up for institutional buyers tomorrow. Franklin County will issue the debt on the hospital’s behalf. Peck, Shaffer & Williams LLP is bond counsel.

Double-A rated Nationwide is moving forward with an ambitious capital plan that will nearly double its debt load at a time when half of the hospitals in Ohio plan to postpone their capital projects amid fiscal ­pressures, according to a recent survey.

In addition to selling the new-money debt, Nationwide officials are beginning the process of negotiating with lenders to replace or renew its standby bond purchase agreements, most of which are provided by JPMorgan Chase Bank NA.

Like other health care issuers, Nationwide last year was forced to refinance nearly all its variable-rate debt in order to shed downgraded bond insurers and failed auction-rate securities.

The finance team opted to keep the debt in the variable-rate mode while replacing the insurance with standby bond purchase agreements, most of which are now scheduled to expire next May.

In a sign of an improved market, hospital officials said that, unlike last year, this year several banks are interested in offering credit.

“What we’re hearing is that market conditions have improved from what they were last year,” said Luke Brown, Nationwide’s vice president and controller. “If folks’ interest is any indication, it has. We have several institutions that are eager to talk to us about this business.”

After the sale, Nationwide’s debt portfolio will total roughly $451 million. Of that 47% will be fixed rate and 53% variable rate. All but 10% of its variable-rate debt is fixed with interest-rate swap agreements.

“It made sense for our portfolio” to issue fixed-rate debt, Brown said. “That, coupled with the historically low fixed interest rates, were the two real selling points.”

Today’s borrowing will increase Nationwide’s debt by nearly 30%. It comes a year after the system issued $100 million, which also meant a big rise in its debt load, according to credit analysts.

“It’s a bit of a ramp-up for us,” Brown said of the capital plan. About one-third of the $800 million will be borrowed — including last year’s $100 million borrowing and this week’s offering — and the rest will be financed with cash and donations, he said.

Proceeds from the sale will help finance construction of a new inpatient tower on Nationwide’s main Columbus campus. The tower is one of the largest pieces of the capital plan, which also includes construction of a new research building and parking garage.

Ahead of the sale, analysts warned that Nationwide’s most significant challenge over the next several years will be managing its capital program with a substantially higher debt load. Moody’s Investors Service rates the system’s debt Aa2, and Fitch Ratings rates it AA with a stable outlook.

Officials will consider issuing another roughly $50 million in the next few years depending on its operating performance.

“We’re very interested in maintaining our current credit rating and we’re pretty thoughtful and disciplined about when we borrow money.” Brown said. “So when we go [into the market] next will be based on how we perform in the next two to three years and where we are when we get there.”

As the only comprehensive specialty children’s hospital in central Ohio, Nationwide maintains a 93% market share in Franklin County and an 84% market share in the six-county region, Moody’s said.

Its location in Columbus means the provider enjoys a stronger economy than much of the economically ailing state. The hospital is also the primary pediatric teaching site for the Ohio State University of College of Medicine.

But the health care provider is not immune from Ohio’s financial problems. Like most children’s hospitals, Nationwide is highly dependent on Medicaid, which provides up to 47% of its gross revenues. To offset falling revenues the state has flattened its reimbursement rates over the last few years.

Reduced Medicaid reimbursement rates are “something we’re always mindful of, but at this point in time it doesn’t pose any larger risk than in past several years,” Brown said. “The funding is flat, which doesn’t sound great, but in the current economic environment it’s not a bad outcome at all. In other states it’s getting cut pretty substantially.”

Meanwhile, hospitals in Ohio this year face fresh pressure from a new fee that lawmakers imposed as part of the 2010 budget to help chip away at the state’s deficit.

The so-called franchise fee will tax hospitals 1.5% of their revenue in 2010 and 1.6% in 2011. Under the plan, the state will later reimburse the providers for most of the fees in the form of increased Medicaid payments.

Most health care executives have warned that the new fee would have a significant impact — and most have said they would postpone capital plans and lay off additional employees to deal with expected budget shortfalls — but Nationwide expects the final result to be revenue-neutral.

“It poses a concern for all hospitals, and there are plenty of hospitals in Ohio that are concerned about how this is going to shake out,” Brown said. “But we feel pretty good [that the reimbursements] will be close to break even, because of some supplemental funding that is part of the state’s budget process for children’s hospitals.”



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