Seattle Children's Hospital Sets $118 Million Offering

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MENLO PARK, Calif. — Seattle Children's Hospital will price $118 million of fixed-rate revenue bonds today in a deal driven partly by the huge demand for tax-exempt paper.

The hospital is issuing the bonds through the Washington Health Care Facilities Authority.

The deal will price for institutions today after a retail order period Wednesday, according to lead underwriter Goldman, Sachs & Co. JPMorgan and Bank of America Merrill Lynch round out the team.

The deal comes with ratings of AA from Fitch Ratings and Aa3 from Moody's Investors Service, both with stable outlooks.

"When it comes to certain types of bonds, a lot of people stay away from hospital bonds because they tend to be a little more risky, but it sounds like a Seattle Children's Hospital is a stronger, larger organization," said Alexander Anderson Jr., a portfolio manager at Envision Capital Management in Los Angeles.

"There is so much demand out there for municipal bonds, especially high quality, I am sure the bond issue, depending on pricing, will probably be very well-subscribed to," he said.

Proceeds will be used to refinance the hospital's borrowing under a short-term line of credit, reimburse it for cash spent on buying property, refund 1998 bonds, reimburse prior capital spending, and pay for the issuance costs, according to Fitch.

Hospital management moved up the issuance from 2012 because of lower interest rates, Fitch analyst Emily Wong said in a report.

Warren Hewitt, chief accounting officer and vice president of finance at the hospital, confirmed the report but declined to comment, citing disclosure concerns.

Standard & Poor's does not rate the credit. Kaufman, Hall & Associates Inc. is the hospital's financial adviser on the deal.

Seattle Children's is the leading pediatric hospital in its region, serving Washington, Alaska, Idaho, and Montana.

Despite the high ratings, there are concerns over the hospital's debt burden.

"Following a material increase in debt over the last year, debt measures are somewhat weaker than typical for the Aa3 rating category," Moody's said.

After this issuance, Seattle Children's will have $500 million of debt outstanding — 65% fixed rate and 35% in underlying variable rate, Fitch said.

The hospital also needs $550 million in future capital for fiscal 2010 through 2014 to help fund a new patient wing, a new emergency room, hospital renovations, and information technology needs.

The hospital's funding plan includes $200 million from debt — $75 million from this issue, $50 million in 2012, and $75 million in 2014; as well as $350 million from cash flow.

However, the rating agencies said Seattle Children's finances so far still look good with strong operating cash flow, solid liquidity, and strong fundraising.

The hospital's fiscal 2009 performance beat projected results and patient volumes have continued to increase. It has implemented new policies to offset expected Medicaid reimbursement reductions, including cutting labor expenses and increasing rates.

The hospital's payer mix is around 46% from Medicaid, which is not unusual for a children's hospital, according to Moody's.

Fitch and Moody's recently predicted downgrades in the health care industry are likely to continue to outpace upgrades for the next 12 to 18 months as the sector prepares to implement changes resulting from the new federal health care law.

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