CHICAGO — St. Louis-based SSM Health Care System took retail orders yesterday on $280 million of fixed-rate bonds that will be open to institutional investors today. The deal will be followed early next month with $300 million of floating-rate debt.
The combined issues will raise $75 million of new money for various capital projects, including the system’s new $90 million hospital in Janesville, Wis., just north of the Illinois border and 40 miles south of Madison. The remaining $505 million of refunding bonds will defease outstanding debt, refinance debt for savings, retire a bank loan, and restructure various existing tranches with the goal of reducing the system’s put risks.
The fixed-rate piece of the transaction includes a mix of serial and term maturities in a $124.7 million series and a $156.5 million series. The first will sell through the Wisconsin Health and Educational Facilities Authority and the second through the Missouri Health and Educational Facilities Authority.
The floating-rate bonds will sell in three series in early May. Series C will consist of $97 million of variable-rate demand obligations carrying a standby bond purchase agreement from Bank of America. Series D will include $112.9 million of VRDOs carrying a letter of credit from JPMorgan Chase Bank. Series E will be comprised of $89.8 million of VRDOs carrying a LOC from PNC Bank. All three series will sell through the Missouri authority.
Citi and Goldman, Sachs & Co. are co-senior managers. Ponder & Co. is financial adviser. Gilmore & Bell PC is bond counsel. Bank of America Merrill Lynch, Edward Jones, and JPMorgan are co-managers.
SSM typically holds a retail order period as its strong ratings provide a draw, especially in Missouri, where the bonds also offer a state income tax exemption.
The debt restructuring is aimed at both saving on debt costs, lowering market risks, and addressing expiring liquidity.
“SSM likes where fixed rates are so the restructuring will move more of its debt into that mode, but SSM also has strong liquidity so it makes sense to keep some floating rate,” said Jennifer Daugherty, a managing director at Ponder who is advising on the deal.
After the sales, SSM’s portfolio will comprise 35% fixed- and 65% variable-rate debt. The system has fixed payer interest-rate swaps on $648 million of outstanding debt, with Citibank serving as counterparty on $263 million and UBS as counterparty on $385 million.
The upcoming issues will not affect any of the swaps. The market valuation of the swaps at the end of 2009 was negative $44 million, which has not triggered any collateral posting requirements.
Ahead of the sale, Fitch Ratings and Standard & Poor’s affirmed the system’s AA-minus underlying ratings and stable outlooks on $1.2 billion of post-issuance debt. It owns, manages, or is affiliated with 16 acute-care hospitals, a pediatric hospital, and two nursing homes located in Missouri, Illinois, Oklahoma, and Wisconsin. The facilities generated total operating revenue last year of $2.8 billion.
“The rating reflects our view of SSMHC’s improved operations and solid pro forma maximum annual debt service coverage,” said Standard & Poor’s analyst Antionette Maxwell. “Further supporting the rating are SSMHC’s strong management and its solid business base in diverse marketplaces.”
After a difficult 2008 during which the turmoil of the financial markets took its toll on the system’s balance sheet due to investment losses and declining patient volumes, SSM saw its operating margin improve to 3.6% at the close of 2009, up from 1.6% a year earlier and its highest in six years. It has maintained the improvement for the first two months of 2010. Fiscal 2009 revenue provided 3.6 times debt-service coverage.
The system had $1.4 billion in unrestricted cash and investments at the close of 2009, providing a “strong liquidity position,” Fitch wrote.
The system’s primary credit challenge is the competition posed by other facilities in several of its key markets, especially Wisconsin, where its facilities generated 21% of SSM’s net income last year, according to Fitch. But the system does benefit from a leading market share in its Wisconsin service area.
SSM’s large unfunded pension obligation also is a concern, Standard & Poor’s warned. The system put $46.2 million towards its pension plan last year and will contribute $47.3 million this year.
It also faces challenges in managing a large, albeit scaled-down, capital budget of about $250 million planned annually over the next five years, financed through a mix of cash, investment earnings, and borrowing to support its competitiveness in core markets. Officials have said the provider would further scale back capital projects if cash flow falters or other economic pressures escalate.
The system spent $400 million over the last two fiscal years on capital projects, including its St. Clare replacement facility in St. Louis. Rating agencies called the new facility a positive factor because it has strengthened SSM’s hometown position.
Initial construction on the new St. Mary’s hospital in Janesville was delayed due to the market turmoil, but the system broke ground last fall on the facility, which is expected to open next year.
