CHICAGO — Lured by attractive Treasury rates and the absence of tax-exempt compliance issues, the Mayo Clinic accelerated its borrowing plans and opted to go with taxable paper in a $300 million issue ready to sell as soon as Wednesday.
The bonds are tentatively structured to mature in terms due from 2039 to 2043, but could change depending on demand, said the clinic’s manager of treasury services, Rick Haeflinger.
Bank of America Merrill Lynch is the book-runner with Wells Fargo Securities also serving as an underwriter. Dorsey & Whitney LLP is bond counsel and Raymond James | Morgan Keegan is advising the clinic.
Ahead of the sale, Moody’s Investors Service affirmed the Rochester, Minn.-based clinic’s Aa2 rating and Standard & Poor’s affirmed its equivalent AA rating. The hospital has $2.4 billion of rated debt. Both agencies assign a stable outlook.
The internationally known facility sold $200 million of new-money earlier this year and had not anticipated a return to the tax-exempt market to fund its capital program until next year. That changed as the clinic and its advisers watched Treasury yields sink.
“We moved our plans up given where rates are and decided to use the taxable market given the ability to get the deal done quickly,” Haeflinger said. “With spreads so narrow we didn’t see much advantage in doing it tax-exempt.”
By forgoing the tax-exemption, Haeflinger said the clinic can more quickly put the proceeds to work since it won’t have to identify qualified tax-exempt projects and it is freed of regulatory compliance issues.
Though the city of Rochester has always been a helpful partner in providing Mayo with access to the tax-exempt market as have been other local authorities where its facilities are located, Haeflinger said the ability to bypass use of a conduit smoothed the issuance process.
The clinic has privately placed some taxable paper in the past, but the $300 million sale marks its first public offering to taxable buyers. On Monday, the 30-year Municipal Market Data top-rated yield stood at 3.01% while the 30-year Treasury yield was at 2.93%.
Proceeds will finance various long-term projects. Mayo intends to spend $3.5 billion over the next five years on capital projects with plans to issue about $250 million in additional debt over the next few years. “We believe this higher level of capital spending will be manageable at the current rating level,” Standard & Poor’s said.
Projects include improvements to existing facilities and the construction of new ones, including two proton therapy centers. Capital plans include the expansion of the emergency department at Saint Mary’s Hospital in Rochester. The clinic is building two proton therapy centers, which use protons generated through an acceleration process to target cancer cells, one at its main Rochester campus and another at its Arizona facility. The system also has a Florida campus. The system operates a total of 22 hospitals and approximately 3,700 employed physicians in Minnesota, Iowa, Wisconsin, Florida, Georgia, and Arizona.
Other projects include three new centers: the Center for Regenerative Medicine, the Center for Individualized Medicine, and the Center for the Science of Health Care Delivery.
Mayo’s rating reflects its “strong international reputation for patient care and research; large scale of the organization with revenue in excess of $8 billion; very strong financial performance and favorable payor mix across three distinct markets,” Moody’s said.
Following a turnaround in fiscal 2009, the system has seen several years of improved operating performance with strong results in fiscal 2011 as it moved to a more centralized operating company model. Maximum debt service coverage remained very strong at 7.46 times in fiscal 2011.
The system’s challenges include a large research and education mission that required $256 million of system support in fiscal 2011 and a 28% exposure to private equity as part of its long-term asset fund. Its Florida and Arizona facilities also operate in competitive markets and capital spending is on the rise.
Standard & Poor’s noted that the start of fiscal 2012 has not been as strong as fiscal 2011 due primarily to weaker fundraising due to a large one-time gift in 2011. Gifts totaled $277 million in 2011 and for the first six months of fiscal 2012 were just $51 million.
