Wisconsin's Aurora Health Care to Finish Delayed Refunding

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CHICAGO — After more than a year of waiting out the market, Wisconsin’s largest health care provider, Aurora Health Care Inc., this week will complete refunding plans put on hold amid rising rates in 2010 with the sale of nearly $400 million of fixed-and floating-rate bonds.

The system, which operates 15 acute-care hospitals, will sell $237 million of fixed-rate bonds on Thursday after completing the sale of $150 million of variable-rate securities on Wednesday, said Steve Huser, vice president of treasury.

Bank of America Merrill Lynch and BMO Capital Markets are underwriters. BMO’s commercial banking parent, Bank of Montreal NA, will provide a letter of credit for the floating-rate tranche. Ponder & Co. is Aurora’s financial adviser.

Most of the transaction will refund outstanding debt, though it includes $41 million of new money that Aurora will use to reimburse itself for various capital projects. Ahead of the deal, Fitch Ratings affirmed the system’s A rating and Moody’s Investors Service affirmed its A3 on a total of $1.4 billion of debt. Both agencies assign stable outlooks.

The system issues through the Wisconsin Health and Educational Facilities Authority. The bonds are secured by a security interest in the system’s pledged revenues and a mortgage interest in St. Luke’s Medical Center.

Aurora refunded $140 million of debt in late 2010 in a scaled-down sale due to rising long-term rates and widening credit spreads that hit health borrowers especially hard. The system opted to just refund shorter maturities and wait to return to the market when rates improved.

With both rates and credit spreads for an A-rated health care borrower down, Aurora decided the time was right. The finance team recommended moving around maturities within the original maturity schedule to increase the savings level.

“We are viewing this as the completion of the original transaction and are optimizing the savings by adjusting maturities to take advantage of the slope and position of the yield curve,” Huser said. Over 3.5% in present-value savings is anticipated.

Aurora’s transaction is one of the few pending WHEFA health care deals that do not use a direct placement or private placement structure. Many borrowers, especially those with lower ratings, have found such alternatives more affordable over a traditional public offering.

WHEFA executive director Larry Nines said borrowers using his agency have found lower rates for direct placements on their shorter-term deals.

Huser said he considered the direct-placement route, but found “a traditional approach” worked out best for savings.

In its review, Fitch said Aurora benefits from a leading market share position in eastern Wisconsin that grew to 31% in 2010 from 25.4% in 1999, far ahead of its nearby competition Wheaton Franciscan Health System and Froedtert & Community Health. Its operating profitability margins have been steady over the last four years and provided debt service coverage of 3.8 times in 2010. The system generated $4.17 billion of revenues in 2010.

The big challenge is weak liquidity levels with unrestricted cash and investments totaling $850 million in 2010, providing 82.5 days’ cash of hand, Fitch said.

Moody’s cited Aurora’s leading market position, consistent profitability, sizable base of physicians, conservative investments, and the long terms on its managed care contracts as favorable credit factors. Challenges include annual declines in admissions, a large unfunded pension obligation of $320 million, and modest liquidity.

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Healthcare industry Wisconsin
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