Virtua Health in southwestern New Jersey will issue $565 million of fixed- and variable-rate bonds in the next few weeks to finance a new 368-bed hospital set to open spring 2011.
The New Jersey Health Care Facilities Financing Authority will act as conduit issuer. During the week of April 27 it will sell $320 million of fixed-rate bonds followed by $245 million of floating-rate debt in early to mid-May.
Morgan Stanley is senior manager for both deals. Ponder & Co. is the financial adviser. Nixon Peabody LLP is bond counsel for the hospital and Windels Marx Lane & Mittendorf LLP is bond counsel for the authority.
The health care provider has roughly $189 million of outstanding debt, according to Bob Segin, Virtua's chief executive officer.
Fitch Ratings and Standard & Poor's assign A-plus and A ratings to the transaction, both with a stable outlook.
Standard & Poor's said it could raise the rating or its outlook on the credit depending upon the completion of the new hospital in Voorhees and future revenue growth.
"Standard & Poor's is not considering a positive outlook at this time because the risks inherent in the replacement hospital construction are beyond the one- to two-year time frame of the outlook," according to a release from the agency. "However, we may consider a positive outlook or higher rating as construction proceeds, especially if Virtua meets its projections, continues to generate solid cash flow, and attracts an increasing number of patients to its facilities."
Assured Guaranty Corp. will insure $295 million of $320 million of fixed-rate bonds. For the floating-rate bonds, JPMorgan Chase Bank NA will provide a $100 million, one-year letter of credit and TD Bank NA and M&T Bank Corp. will offer three-year LOCs for $85 million and $60 million, respectively.
In an effort to retain those three LOCs over a longer period of time, Segin said Virtua's aim is to create lasting banking relationships that are less transactional in nature.
"So therefore if there's a bank that's willing to provide us with a liquidity facility, we want to make sure that it's a long-term relationship," Segin said. "And we're actually shifting some of our banking business to those banks. So it wouldn't be in their best interest to sever the letter of credit relationship if they want to continue to maintain our banking relationship."
The $320 million of fixed-rate bonds will include serials and terms with maturities running from 2016 through 2038, according to Lou George, project manager at the health care authority. The $245 million of variable-rate debt will have maturities out to 2043.
The upcoming deal will more than triple the health care provider's total outstanding debt to some $754 million, although principal payments on the new borrowing will not begin until 2016 to help with cash flows.
Segin said Virtua is conscious of the additional debt. Officials expect the new $463 million facility, which will increase capacity by 69 beds, will generate additional revenue. He projects Virtua's days cash on hand will increase over the next five years to at least 210 days from 177 days.
"Although our position will be temporarily leveraged, we believe that we are conservative in our financial approach moving forward and that this project will certainly add more market share to Virtua from different counties, Philadelphia as well as Washington Township," Segin said. "And we will continue to meet or exceed our financial projections moving forward."
Fitch said the credit should be able to absorb the additional debt load as the new hospital will most likely increase the system's liquidity and its current 32.3% market share.
"It's a once-in-a-generation kind of project and the ability to build a brand-new hospital on a greenfield site, particularly in New Jersey, is a rarity and so from a strategic point of view it really is strong," said analyst Gary Sokolow. "And given their strong operations over the past four to six years, I think we're comfortable with the reason why they're taking on the debt and their ability to absorb that debt and complete this project and move forward."
The new debt will increase Virtua's total floating-rate debt to $338 million. It does not have any derivatives and there are no swaps attached to the upcoming deal. Officials expect Virtua to save interest costs over the long term by using floating-rate debt that is not synthetically swapped to a fixed rate, according George.
"Once you start doing swaps, there's more risk and a lot of hospitals have found that to be the case in the recent economic environment," he said. "But with a pure variable-rate deal, generally you do find that it's more cost-effective."
As of April 16, yields on single-A rated tax-exempt health care bonds in New Jersey ranged from 2.12% in 2010 to 6.57% in 2039, with yields 169 basis points over that day's Municipal Market Data triple-A yield curve in 2010, according to Thomson Municipal Market Monitor. The widest yields are on debt maturing in 2017 and 2018, with yields 218 basis points over the MMD curve.
Investors said the overall improvement in the municipal bond market since the beginning of the year has helped health care providers complete their deals. While spreads are wide, deals are getting done, said Mike Rosenthal, managing director of research at Nuveen Investments.
In addition, buyers may find good hospital investments with health care providers that have stronger balance sheets and have a large presence within the local market sector.
"I do believe that there are values in the A-rated hospital sector, but you have to really do your research and pick your spots," Tom Dalpiaz, portfolio manager at Advisors Asset Management, said in an e-mail. "The rating agencies have voiced their caution on hospital ratings and the valuations on hospital paper have been weak recently. Health care reform is on the horizon. This has created opportunity. Hospitals or systems that dominate their service areas can be somewhat recession-proof and may be interesting values right now."
Bond proceeds will reimburse Virtua for $105 million that it has already spent on the new facility as construction began about one year ago. The new hospital is nearly two and one-half miles from the current facility, with a major state highway running past the location. Set on 120 acres of land, the new site offers room for additional expansion in the future, although Segin doesn't anticipate another new-money borrowing for another five to seven years.
The new Vooheers hospital will be a state-of-the-art facility with 368 private rooms that offer new technology, less invasive surgical procedures, and shorter recovery times, according to Virtua's Web site. Programs include women's and children's health, orthopedics and spinal care, neurosciences, oncology, cardiovascular services and surgical procedures.
"The rooms will be computerized and there will be wired and wireless equipment integrated into the clinical information system," Segin said.
While Virtua ended fiscal 2008 on Dec. 31 with a net loss of roughly $30 million due to losses on investments, the system's operations had a surplus of $90 million, a 9% operating margin, Segin said. Medicare and Medicaid account for 36% and 4% of Virtua's payor mix.
"Given that the biggest part of their payor mix is private insurers, it's a very strong payor mix relative to other hospitals," Sokolow said.
Virtua Health has four hospitals, outpatient surgery facilities, and rehabilitation and nursing centers. Its Voorhees and Mt. Holly hospitals deliver 7,600 babies each year. It employs 7,900 clinical and administrative personnel and has 1,800 physicians and medical staff.
