CHICAGO — Cleveland’s single-A rated University Hospitals Health System Inc. plans to open a retail order period Monday for roughly $92 million of refunding bonds in a transaction that will shift a chunk of the system’s variable-rate debt into a fixed-rate mode.
UHHS will open up the deal to institutional buyers Tuesday.
The transaction is expected to feature mostly long-term fixed-rate debt, but could include some bonds with mandatory seven-year tenders. The finance team will decide Monday morning whether to opt for the shorter-term product.
Ohio will issue the bonds on the system’s behalf. Bank of America Merrill Lynch is the senior manager on the transaction.
Citi is co-manager, with four additional firms rounding out the underwriting team. Squire, Sanders & Dempsey LLP is bond counsel. Ponder & Co. is financial adviser.
The refunding comes after UHHS spent the last two years dealing with problems tied to its floating-rate debt portfolio, including the collapse of the auction-rate market and negative swap valuations that have forced the system to post collateral.
The health care provider’s debt portfolio totals $920 million. Of that, more than $738 million is variable-rate debt that is artificially locked in a fixed-rate mode with a series of interest-rate swaps.
After reporting relatively large negative swap valuations throughout 2008 — resulting in a reduction of non-operating revenue by $74 million — the trend was largely reversed in 2009, according to bond documents.
As of last September, the system had posted about $13 million in collateral, according to Moody’s Investors Service.
The debt structure leaves the hospital with some bank-related exposure, but Moody’s noted the exposure is diversified, with four banks providing support for $273 million of debt.
The letters of credit also feature relatively long expiration dates.
Moody’s rates the debt A2 with a stable outlook. Standard & Poor’s early last year lowered its rating on the system’s underlying debt to A from A-plus, with a stable outlook.
The bonds are backed by revenue of the obligated group, which includes University Hospital Case Medical Center, the primary teaching affiliate of Case Western Reserve University’s medical school.
One of Cleveland’s largest hospitals, UHHS is in the midst of a $1 billion capital campaign that is aimed at increasing its market share.
The system is expected to spend $447 million this year to finance the campaign. Most of the money comes from bonds sold last year and in 2007. It is not expected to enter the market with new-money borrowing this year.
UHHS enjoys a 27% market share in the eight-county region. Its main competitor is the Cleveland Clinic Health System, which has a 46% market share.
