DALLAS — The University of Colorado Hospital Authority will issue $290 million of fixed-rate revenue bonds this week to add Memorial Health System of Colorado Springs to its new statewide network and another $138 million to refund existing debt.
The deal will bring Memorial, owned by the city of Colorado Springs, into the University of Colorado Health system.
The deal was nearly sidelined by a lawsuit filed by the Public Employees Retirement Association of Colorado seeking to halt the lease of Memorial, but PERA agreed earlier this month to drop UCH from the suit filed in Denver state district court.
The absorption of Memorial into the University of Colorado Health system, along with the previous addition of Poudre Valley Health System in Fort Collins, is expected to make the University of Colorado a national player among teaching hospitals.
“In our opinion, UC-Health is positioned to improve its market presence further and we believe that its already-solid financial profile will continue to grow over time as the synergies under the new system structure are realized,” Standard & Poor’s primary analyst Kenneth Gacka wrote.
The bonds are scheduled to price Wednesday through negotiation with Citi and JPMorgan as co-managers. Kaufman, Hall & Associates Inc. serves as financial advisor, with Kutak Rock as bond counsel.
The bonds carry ratings of A-plus from both Standard & Poor’s and Fitch Ratings and an equivalent A1 from Moody’s Investors Service, all with stable outlooks.
The new ratings represents a one-notch upgrade from S&P on outstanding bonds and a two-notch increase from Moody’s previous A3.
The ratings also represent an upgrade on existing parity debt issued for the Poudre Valley Health System, which became part of the UCH system in January.
Under the deal with UCH, Colorado Springs is required to defease or redeem the city-owned Memorial Health’s outstanding debt using Memorial’s available cash, according to the preliminary official statement for the upcoming deal.
Memorial had $305 million in revenue bonds outstanding at the end of 2011, according to a financial report posted on the Municipal Securities Rulemaking Board’s EMMA website.
Memorial will join UCH officially on Oct. 1. The Colorado Springs City Council selected UCH to operate the public hospital earlier this year and won voter approval for the change on Aug. 28.
As employees of Colorado Springs, staff at Memorial were covered by PERA, the Colorado retirement pension system. After Oct. 1, they become subject to UCH’s employee benefit programs.
While still seeking reimbursement for the loss of contributions from the hospital’s employees, PERA agreed that it would not challenge the hospital’s lease arrangements with UCH. Pending adjudication, Colorado Springs agreed to hold $220 million in escrow.
According to PERA’s lawsuit, the city needed to obtain the votes of 65% of the employees to exit the pension system. The city was also required to hire an actuary to determine Memorial’s unfunded liability. Then, the city should have been prepared to pay the $220 million of unfunded liability, according to the lawsuit. Finally, PERA’s board would have had to approve the exit.
The suit originally named the city, University of Colorado Health, the University of Colorado Hospital Authority, Memorial Health System and Poudre Valley Health Care.
PERA’s suit said that allowing Memorial to leave the plan without paying the money would cause “irreparable harm” to employees’ retirement benefits and options without giving them the chance to vote to remain in PERA.
The suit maintains that a fully vested employee would have to wait an additional 10 years to receive full benefits.
“The damage will be immediate and irreparable,” the suit said. “For all employees, being deprived of a defined-benefit retirement … constitutes irreparable harm and will represent a significant diminishment in both the security and payments to retirements. There is no way to measure such losses.”
The suit lists the city of Colorado Springs and Colorado Springs Utilities as the second- and third-largest employers in PERA’s local government division.
Under the capital lease, UCH will pay the city $290 million from proceeds of the Series 2012A bonds.
UCH will also pay the city $110 million over 30 years, fund $3 million per year for 40 years for the development of the University of Colorado School of Medicine in Colorado Springs, and provide an average of $28 million annually for capital expenditures.
Under the new arrangement, the UCH system will have $1.3 billion of long-term debt secured by gross revenues.
The three hospitals together have a combined pro forma revenue base of over $2.2 billion, and produce over 70,000 admissions, according to Standard & Poor’s analysts.
As part of the 2012 plan of finance, UCH plans to restructure $138.5 million of variable-rate direct purchase bonds, but details have not yet been provided, analysts said.
Memorial becomes the southern anchor of the new system, with Poudre Valley Hospital in Fort Collins and the Medical Center of the Rockies in Loveland as northern anchors on the Interstate 25 corridor that connects most of Colorado’s population along the Front Range of the Rocky Mountains.
The University of Colorado’s main hospital at Anschutz Medical Campus is located between the two acquisitions in the Denver suburb of Aurora. The campus occupies the former site of Fitzsimons Army Hospital that was decommissioned in 1999.
The university moved its medical school to the campus from Denver after the Army left the site. The campus now includes the university’s nursing, pharmacy, public health and biological research facilities.
Another part of the site known as the Fitzsimons Life Science District includes a 184-acre Colorado Science and Technology Park, the Children’s Hospital, a future Veterans Affairs hospital, and a residential-retail town center known as 21 Fitzsimons.
Officials promote the latest UCH deal as an economic boost for Colorado Springs, the state’s second largest city, about 60 miles south of Denver.
“You can look at our track record for a glimpse of what we’ll bring to El Paso county,” said Lilly Marks, chairwoman of the University of Colorado Hospital board of directors and executive vice chancellor of the University of Colorado Anschutz Medical Campus.
“We’ve made significant financial investments and expanded even as the economy has contracted. We’re committed to the success of Memorial, and we believe local businesses will embrace this partnership.”
