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The Drought Is Over as Top Hospitals Come to Market

APR 24, 2012 6:46pm ET
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CHICAGO — The drought is over for investors interested in top-rated health care paper.

“People have been starved for health care bonds,” said Susannah Page, director of municipal bond research at Bank of America Merrill Lynch, who covers the sector. “There’s been so little issuance and now we’re starting to see it.”

At least eight Midwestern health care providers are set to enter the market over the next two weeks, offering more than $1.3 billion of bonds. Leading the pack this week is a trio that represents the region’s largest and most prestigious providers.

The Cleveland Clinic is issuing $464 million with a retail order period set for Tuesday and institutional pricing scheduled for Wednesday.

Ohio’s largest health care system, Catholic Health Partners, will follow a day later with a $269 million deal that offers a mix of fixed-rate and variable-rate debt.

Michigan’s Trinity Health, one of the nation’s largest providers, priced $289.5 million of revenue bonds Tuesday, according to Thomson Reuters.

All three credits carry ratings in the double-A category, setting them apart in a sector where 75% of hospitals are rated either single-A or triple-B, according to Standard & Poor’s.

North Dakota’s Altru Health System is scheduled to enter the market Wednesday with $125 million of revenue bonds.

Four additional hospital systems were on tap to bring another roughly $300 million of bonds to market in the next two weeks.

Is there enough appetite for all of the paper? Market analysts and bankers say yes, in part because health care issuance has been down all year.

Nationally, hospital bond sales totaled $5.6 billion, with 80 separate issues, from January to April 23, 2012, according to Thomson Reuters. That’s slightly higher than the same period last year — $5.5 billion — but down by more than 50% compared to 2008, 2009 and 2010. For the same period in 2010, hospital bond sales totaled $11.58 billion with 127 issues.

The same trend prevails in the Midwest, where volume hit $1.7 billion, with 24 separate issues through April 23. That’s up from the $938.5 million during same period in 2011, but way down from previous years. Midwest hospital volume totaled $4.1 billion for the same period in 2010.

The top-notch ratings of many of the credits coming to market now will also attract investors, Page said. “If you’re looking at double-A rated credits, that’s as good as you’re going to get,” she said. “We don’t do any better than that in the health care world. It’s going to be a really interesting week.”

The growing trend of privately placing debt directly with a bank has also curbed volume over the past year. Direct loans have been particularly popular with health care providers, who generally have close relationships with bankers. At least two of the big credits in the market this week opted for public sales because they already did large private placements last year.

Catholic Health Partners did two refunding deals last year that totaled $187 million, officials said. “Our debt portfolio already includes a significant component of direct placement debt,” said Andy Spohr, director of debt management.

Cleveland Clinic also did a private placement in 2011, prompting this week’s public sale, according to Mike Harrington, the clinic’s chief accounting officer and controller.

This year’s anemic health care market may also be due in part to the uncertainty surrounding the Supreme Court’s ruling on the new federal health care law. Though the court is not expected to rule until late June or early July, before its summer recess, the hearings, held in late March, gave industry observers a chance to hear the arguments and gauge for themselves the way the court is seeming to lean, Page said.

“Nothing actually changed after the hearings, but it was just the psychology of waiting for March to come so they would have actually have the hearings, people might have been waiting for that,” she said. “Perhaps internally [hospital officials] do have an opinion as to what the decision will be.”

Preliminary bond documents for all the issuers feature extensive bondholder risks, with sections on everything from the new federal law to state budget cuts, highlighting the uncertainty felt by many of the providers.

Like all issuers, the Cleveland Clinic includes a long section warning investors of the unknown consequences of the new law and the pending high court ruling, saying it’s still too early to speculate on the impact of the final ruling.

To investors, officials at the clinic and CHP are touting the fundamental strengths of the credits despite the industry’s larger challenges. Both teams are promoting their strong balance sheets, reputation and market share, officials said.

“We’re a highly rated entity that has a strong balance sheet to support the debt service of these bonds, and we’re well positioned for the future,” Harrington said in an email. He said the clinic’s investment bankers assured him demand is strong enough to absorb all the health care paper expected to be in the market this week.

JPMorgan is Cleveland Clinic’s senior book-running manager with five additional firms on the deal. Squire Sanders LLP is bond counsel. Ohio is the conduit issuer.

The bulk of the $464.2 million issue is new-money bonds, with $95.3 million set as refunding bonds. The clinic expects to save $9 million on the deal.

CHP plans to enter the market the day after the Cleveland Clinic, with a retail period set for Wednesday and institutional sales Thursday. Allen County, Ohio, is the conduit issuer. Morgan Stanley and JPMorgan are senior managers on the six-member syndicate. Peck, Shaffer & Williams LLP is bond counsel.

CHP’s finance team, talking to investors last week ahead of the deal, touted the system’s market share — it’s Ohio’s largest provider and also operates hospitals in Indiana and Kentucky — as well as other strengths, according to Jerome Judd, CHP’s vice president of treasury.

“Our strengths continue to be our strong operating performance, market share in our markets, clinic physician integration and the strength in balance sheets,” Judd said.

Despite the crowded market, CHP should stand out, Spohr said. “Even with all the other issues, there’s ample demand,” he said. The $268 million issue includes $172 million of new money and $95 million of refunding debt.

The finance team expects to achieve a net present-value savings of 9% on the refunding piece, Judd said. The deal includes $100 million of variable-rate debt and $72 million of fixed-rate bonds.

For the first time, the system will offer variable-rate bonds supported only by CHP’s own liquidity. “That’s new for us,” Judd said. “We have the liquidity on our balance sheet to do it, and we’re trying to keep our variable-debt structures diversified, and we think this is another component of that.”

Among the lowest-rated Midwestern hospital credits to price this week is Altru Health System, a physician-operated hospital that dominates its service area and is the only acute-care facility for Grand Forks, N.D. Moody’s Investors Service rates the system Baa1 with a stable outlook and Fitch Ratings rates it A-minus.

Proceeds from the new-money piece will be used to buy three new facilities, including a hospital. B of A Merrill is senior manager and US Bank is co-senior. Dorsey & Whitney LLP is bond counsel.

Also on tap to enter the market over the next two weeks is Kettering Health Network, with $94.2 million of refunding bonds through Montgomery County, Ohio. Bank of America Merrill is also the underwriter on the deal.

Double-A rated Nationwide Children’s Hospital is set to price $75 million of new-money revenue bonds the week of May 7. The deal will be through Franklin County, Ohio.

The Children’s Hospital Medical Center of Akron, which carries high single-A ratings, will gearing up to sell $95.4 million of new-money and refunding bonds through the Akron, Bath and Copley Joint Township Hospital District. Goldman, Sachs & Co. is the underwriter on the deal.

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