Texas Hospital to Retire ARS With $78 Million Deal

DALLAS — Texas Children's Hospital in Houston will open the new year by retiring $78 million of auction-rate securities almost two years after the market for that type of debt collapsed.

The refunding bonds will be issued through the Harris County Cultural Education Facilities Finance Corp., which serves as the conduit for four other private Houston hospitals. The negotiated deal is tentatively scheduled for the week of Jan. 4.

The 2010 bonds have been rated AA by Fitch Ratings and are awaiting ratings from Standard & Poor's and Moody's Investors Service. Standard & Poor's rated a $200 million deal for Texas Children's Hospital in May at AA. Moody's rated that deal Aa2.

The hospital has $735 million of outstanding debt. This deal will retire all of its outstanding auction-rate debt.

"Despite a significant amount of variable-rate debt, its excellent liquidity position bolstered by strong operations and tremendous philanthropic support provides an adequate cushion to mitigate the risks associated with its debt portfolio, the effects of the current economic environment, and the complexities associated with the multiple ongoing construction projects," Fitch analysts wrote.

Hospitals were among the largest issuers of auction-rate securities, along with airports and college loan programs. Houston's other major hospitals have also issued refunding bonds this year to retire their ARS.

Once touted as liquid investments comparable to money-market accounts, the auction-rate securities began to lose their value when auctions for the bonds failed in early 2008. After banks stopped participating in the $330 billion market in February, 2008, investors began suing broker-dealers for allegedly misrepresenting the securities. So far, judges have dismissed five class-action lawsuits against brokers and dealers for failure to meet the standards for securities-fraud lawsuits or lack of proof that the investors lost money.

Issuers were initially stung by high reset rates on the ARS that drove their interest costs on the previously attractive bonds to painful levels. That triggered a wave of refinancing efforts beginning in 2008. However, rates on some of the ARS have fallen to more affordable levels, easing the crisis for issuers.

Texas Children's Hospital is adjusting its debt amid a $1.5 billion capital construction program known as Vision 2010. The program, funded in part by the $200 million issue in May, is on schedule and within budget, according to Fitch analysts.

Additional issuance is expected to cover the $575 million maternity ward, the $220 million west campus, the $215 million Neurological Research Institute, and the $107 million Feigin Center expansion.

With 639 licensed beds, Texas Children's Hospital is the largest children's hospital in the U.S. The hospital is affiliated with the Baylor College of Medicine.

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