SAN FRANCISCO — California’s Sutter Health will sell $900 million of tax-exempt revenue bonds this month in the health care provider’s first trip to market in two years.
Sutter’s fixed-rate bonds will be sold in two tranches — $325 million through the California Statewide Communities Development Authority and $575 million through the California Health Facilities Financing Authority. The bonds will likely price Jan. 25 with potential maturities of up to 40 years, according to John Landers, managing director at Morgan Stanley, the lead underwriter on the deal.
Despite a fairly strong position, Sutter may run into a difficult market characterized by weaker demand the past two weeks.
“Liquidity is not the greatest right now on the street,” said Ken Naehu, managing director for fixed income at Bel Air Investment Advisors in Los Angeles. “If it is a name that large buyers can add, or don’t have too much of, they might have a fighting chance. But if it is not, this is going to be a tough environment unless things change dramatically in the next week or so.”
Lander remains optimistic about the sale, saying his firm has already received significant interest from institutions.
“Many institutional investors [feel] that if they are going to buy a health care bond in California, they have to own some of Sutter’s bonds,” Landers said. “I think it is unique to Sutter that over the past couple of transactions, we have been able to sell 40-year bonds. That is very unusual.”
The health care provider has 24 hospitals in northern California. It will use most of the proceeds from the issue to fund three major hospital construction projects.
“Our strategy has been pretty consistent for the last 20 years,” Robert Reed, senior vice president and chief financial officer at Sutter, said Wednesday. “We raise money on a fairly regular basis that works out to about $300 million [annually]. This is a bit larger, but we didn’t do a deal last year.”
Sutter’s last bond issue was $340 million through the California Statewide Communities Development Authority in 2008.
The proceeds will help finance the $193 million renovation of Sutter General Hospital. Another $298 million will fund construction of a new eight-story replacement for Sutter Memorial Hospital on the provider’s Sacramento campus.
Sutter will spend $309 million to replace Eden Medical Center on its Castro Valley campus with a new seven-story building adjacent to the current site. In Oakland, Sutter will use $365 million to construct a 13-story building to replace older facilities at its Alta Bates Medical Center.
“The $758 million of new money will be used entirely for those three projects in roughly equal amounts,” said Svend Ryge, vice president and treasurer of Sutter Health.
On the heels of the new issue, Standard & Poor’s upgraded Sutter to AA-minus from A-plus with a stable outlook. Moody’s Investors Service revised its outlook to stable from negative and assigned a Aa3. Fitch Ratings rates the bonds AA-minus with a stable outlook.
“Sutter has maintained strong operating performance despite the soft economy, and has improved its liquidity from the low levels posted in 2008,” Moody’s Brad Spielman said in a note Thursday.
Spielman said the increase in debt puts stress on the company’s leverage levels and its current credit ratings assume those levels will improve. They also envision moderation of future debt and capital spending.
Reed noted that Sutter was able to put $500 million toward pensions, which are now fully funded, during the recession. He said its balance sheet has fully recovered.
Orrick, Herrington & Sutcliffe LLP is bond counsel on the deal.