DALLAS — Woman’s Hospital Foundation of Baton Rouge, La., will revive a halted replacement project with the proceeds from next week’s negotiated sale of $244 million of hospital revenue bonds and $100 million of Gulf Opportunity Zone bonds.
The bonds, which will be issued by the Louisiana Local Government Environmental Facilities and Community Development Authority, are set for retail pricing on Monday and institutional sales on Tuesday.
The proceeds will allow the foundation to resume construction on a replacement facility for the current Woman’s Hospital, which focuses on women and baby services.
The new five-story, 398-bed Woman’s Hospital will be significantly larger than the existing 365-bed facility. The replacement hospital complex will include a medical office tower with outpatient services and support buildings.
Underwriters on the sale are Bank of America Merrill Lynch and Morgan Keegan & Co.
The Long Law Firm LLP is bond counsel. Kaufman Hall & Associates Inc. is financial adviser to the foundation.
The debt is rated BBB-plus by Standard & Poor’s and A3 by Moody’s Investors Service. The bonds are not expected to be insured.
The debt will be supported by the foundation from hospital revenues, which totaled $322.5 million in fiscal 2009. Medicaid patients provided 39% of revenue, with private insurance providing 55% of patient revenue.
Robert Turner, vice president at Kaufman Hall, said the deal is structured to give Woman’s proceeds of $329.4 million from the $344.2 million sale after accounting for an original issue discount. The $244.2 million of revenue bonds carry a prospective discount of $10.4 million, with a prospective discount of $4.3 million on the $100 million of GO Zone bonds.
“It’s hard to say what type of market we have now, because there has not been a lot of debt coming to market so far this year,” Turner said. “Those discounts are an indication of what the underwriters, after talking with potential investors, regard as necessary to provide the necessary proceeds.”
The $329.4 million of proceeds will provide a project fund of $250 million, a debt-service reserve fund of $26.8 million, a capitalized interest fund of $51.7 million, and $5.9 million of issuance costs.
The foundation has invested $56 million in the replacement project, and expects to contribute another $25 million of equity to the effort.
Woman’s had planned to finance the replacement facility with all hospital revenue bonds but decided in 2008 to include $100 million of GO Zone bonds in the financial plan.
The bonds are expected to have serial maturities in 2018, 2019, and 2020 with term bonds due in 2025, 2030, 2040 and 2044, according to the preliminary official statement. Estimated debt-service requirements in the POS are based on interest rates of 6.71% and 6.75%
Teri Fontenot, president and chief executive officer at Woman’s Hospital, said the foundation had more flexibility with GO Zone bond proceeds.
“We could finance the medical office building with a portion of the proceeds from the GO Zone bonds and we wouldn’t do that with the revenue bonds,” she said. “The revenue bonds could not be used to finance anything that is outside the scope of our tax-exempt status.”
She said the new $41 million medical office and outpatient services building will allow physicians currently practicing at Woman’s to relocate their offices adjacent to the new hospital.
GO Zone bonds are tax-exempt private-activity bonds approved by Congress in 2005 to help Gulf Coast states with hurricane recovery efforts.
Construction of the replacement hospital began with a groundbreaking ceremony on June 2, 2008, but work was halted in mid-January 2009 when hospital officials determined the unstable credit market would not provide acceptable interest rates for a planned sale of $300 million of revenue bonds. Contractors were called off the project after concrete structural support columns were completed.
Fontenot said stopping the work was a difficult decision, but proved to be the right one.
“We had planned on a bond sale in the fall of 2008, but that was when the market started unraveling,” she said. “As market instability increased, it became apparent that we would not get the interest rates that we had expected.”
“We had to either increase our equity in the project, which was more than $50 million, or stop the work until we could obtain our permanent financing. We decided to wait,” Fontenot said.
“It was a very hard decision to halt the project and wait on the market, but it turned out to be the right decision,” she added.
Fontenot estimated the delay saved the foundation $38 million through a combination of lower construction costs and a somewhat smaller project than was originally contemplated.
“The original construction contracts were signed in spring and summer 2008, when material costs and construction costs were at their highest,” she said. “With the delay, we were able to negotiate lower contracts.”
Fontenot said the scope of the replacement project was also reduced by about 45,000 square feet, to just under 400,000 square feet.
“The revisions will provide the expansion space we’ll need over the next four to five years,” she said. “We had originally considered providing shell space to be built out over the next five to 10 years. With the revised plan, we can come back in a couple of years and decide where we want to end up.”
Fontenot was confident that more space will be needed as the Baton Rouge area continues to grow.
Woman’s patient load has been growing since Hurricane Katrina hit Louisiana in August of 2005, she said, and new and expanded medical services continue to attract new patients.
The hospital has only minimal competition for obstetrics and neonatal care in Baton Rouge, accounting for 75% of the births in its service area in 2009 and 85% of the neonatal care.
Woman’s is the largest provider of obstetric, neonatal, and gynecology services in Louisiana.
The replacement facility will allow Woman’s to provide more services to more patients, Fontenot said.
“We’ve been adding on and remodeling our hospital since this facility opened up,” she said. “We’re currently on a 24-acre campus that is landlocked. Our patient rooms are too small, and our operating rooms are too small for the medical technology that we use today.”
The hospital foundation bought a 225-acre abandoned golf course five miles southeast of the existing campus in 2002, but Fontenot said it was not considered as the site for a replacement facility until 2005.
“It was determined after much study that it would not be a good investment to expand on the current site,” she said. “Completely replacing the existing hospital with a new campus was in the foundation’s best long-term interest.”
Construction is expected to take 24 months once it gets fully underway, she said. The existing hospital complex may be used as an assisted-living facility or a children’s hospital once the new facility is completed.
