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Deal in Focus

Bonding For Beds In Joplin

CHICAGO — Six months after a devastating tornado destroyed its competitor's facility, Freeman Health System in Joplin, Mo., will come to market next week with $25 million of bonds, primarily to fund additional beds needed to meet a surge in demand for its services.

Freeman will borrow through the Joplin Industrial Development Authority in an issue slated for Tuesday.

First Southwest Co. is the underwriter and Gilmore & Bell PC is bond counsel. The bonds, rated BBB-plus with a negative outlook by Standard & Poor's, will mature serially from 2013 to 2021 with term bonds in 2026 and 2031.

The system plans to advertise the bond sale in the local Joplin Globe newspaper and will give priority to retail buyers in Jasper and Newton counties, according to Michael Newman, a senior vice president and the lead banker on the deal at First Southwest.

Proceeds of the bond sale will finance a series of projects at Freeman Hospital West's tower to support the buildout of its mostly vacant fifth and sixth floors. When construction began on the west tower in 2004, those floors were left mostly unfinished with the sixth floor housing maintenance operations.

"We are pretty much at capacity and have to expand to serve the needs of the Joplin community," said Freeman controller Michael Leone. The system had been considering developing the two floors soon but the tornado's impact accelerated the plan.

The system will finish the fifth floor to house medical and surgical beds. The maintenance department will be moved from the sixth floor, which will be developed to house 13 beds for a surgical intensive-care unit. The hospital will also expand its cafeteria. A total of 58 beds will be added to the 277-bed facility next year.

The surge in demand stems from the destruction of Freeman's competitor, St. John's Regional Medical Center, which is part of Mercy Health System. The May 22 tornado touched down about two miles from Freeman's West Tower and tore through the city.

Freeman's various facilities suffered some damage, but its main buildings survived. Mercy's 370-bed St. John's was a total loss; it has been operating a modular facility with plans to rebuild.

The tornado killed 161 and left 1,000 wounded in southwestern Missouri. Joplin is about 150 miles south of Kansas City. More than 8,000 homes and businesses were destroyed. It was one of the deadliest tornados on record.

The Federal Emergency Management Agency is expected to cover much of the cleanup cost throughout the city with the state picking up the remainder. Donations have also poured in and the Red Cross Joplin Relief Fund holds several million dollars, according to the bond offering statement.

Freeman's 94-bed East Specialty Hospital saw no significant damage in the storm but the west tower — officially known as the Gary and Donna Hall Tower — did sustain some roof damage that caused storm leakage. Overall, Freeman reports in its offering statement that one physician building was severely damaged, and several buildings operated by a member of the Freeman obligated group known as the Ozark Center were a complete loss.

A total of 10 Freeman buildings and eight Ozark Center buildings suffered damage for a total loss of $7.5 million. Freeman carries a $450 million property damage insurance policy with a $50,000 deductible and expects all losses to be covered.

The system does not expect a significant impact on the collection of patient accounts receivables because of changes in the financial circumstances of the Joplin community, but it is monitoring any changes as well as the effect on the value of its real estate holdings.

"The lasting impact of this devastating tornado will not be known for many years. Freeman will continue to monitor its financial statements for impact due to the tornado and adjust them as data becomes more clear," the offering statement reads.

St. John's is building a 327-bed hospital that will open in 2015 with a new modular facility opening in the spring 2012.

Freeman officials don't expect to end up with a surplus of beds once the new St. John's facility opens as it will shift back to private rooms.

Freeman had converted many rooms to semi-private to accommodate demand after the tornado. "We are comfortable that we will need the extra capacity," Leone said.

The bonds are secured by all gross receipts of Freeman Health System, which includes the west and east campuses, the Freeman Neosho Hospital about 20 miles south of Joplin, and the Ozark Center facilities that provide mental health and substance abuse services.

The offering statement includes extensive information about the tornado and an independent review of the system's interim financial results.

Over the summer, First Southwest requested the audit ahead of a remarketing of some existing floating-rate debt with a new letter of credit from U.S. Bank and in anticipation of the new-money issue.

As part of the remarketing, U.S. Bank also took over as remarketing agent from First Southwest.

"We have a responsibility to conduct due diligence of our own," Newman said.

Ahead of the sale, Standard & Poor's affirmed the system's BBB-plus rating and negative outlook. The agency revised the outlook to negative in August due to operating losses and in anticipation of the added debt.

The rating reflects Freeman's weak debt service coverage, although it is improving, and slim operating results, construction risks and an evolving competitive landscape.

Addressing the expansion, analysts said, "We believe this buildout and additional capacity will be accretive to the revenue base when the floors open in April 2012."

Positive operating results for the year to date mark a reversal from last year's $4.7 million loss on a revenue base of $452 million. Management hired outside consultants to work on efficiencies and cost controls.

"It was a rough year with significant reductions in Medicaid and Medicare funds, but we think we have our costs back in line," Leone said.

The system has about $143 million in mostly front-loaded debt that once paid down will also improve its balance sheet, he added.

The city recently marked the six-month anniversary of the storm, dedicating a plaque bearing the names of those killed.

Missouri Gov. Jay Nixon noted the massive rebuilding underway.

"In Joplin, the sun rises every day on a different place, and sets every night on a better place," he said.

The city has issued an average of $35.4 million in monthly building permits since the tornado, compared to $2.1 million the month before the twister, according to published reports. FEMA has provided about $174 million in aid so far.

Moody's Investors Service earlier this month affirmed Mercy's Aa3 rating. St. John's represents just 4% of the system's total operating revenues. It collected $4.3 billion in fiscal 2011.

The new St. John's will be financed with a combination of insurance proceeds, fundraising, and potential FEMA reimbursement. Analyst Mark Pascaris said the impact of the St. John's temporary loss is muted given the "size and scope" of the Mercy system.

Moody's analyst Ted Damutz added that while natural disasters can hurt a credit's liquidity and add to its fiscal pressures, they don't generally result in a quick downgrade. Often, extensive property damage that impacts tax revenue collected by cities and school districts is temporary, and eventually replaced and even improved by rebuilding.

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