Hawaii Pricing $160M for Hawaii Pacific Health

LOS ANGELES — Hawaii’s Department of Budget and Finance will act as the conduit issuer for $160 million in special purpose revenue bonds expected to price Tuesday for Hawaii Pacific Health.

The bonds will be issued in two tranches: $128.6 million in series 2013A and $32.3 million in series 2013B

The series 2013 bonds will be issued as fixed rate debt. The debt payments are secured by a pledge of the gross revenues of the obligated group.

HPH is the largest healthcare provider in Hawaii. In conjunction with this financing, it will convert its letter of credit-backed variable rate demand bonds, Series 2004B, to a variable rate direct bank loan issuing approximately $50 million of unrated, variable rate, direct placement bonds, according to a Moody’s Investors Service report.

A portion of the proceeds will be used to fund part of the $180 million expansion of Kapiolani Medical Center, refund its series 2004A and 1998 bonds, and pay costs of issuance, according to the offering statement.

JPMorgan, Morgan Stanley and Wells Fargo Securities are the underwriters.

HPH is a large integrated regional delivery system with operating revenues approaching $1 billion. The healthcare provider has the leading market position in Hawaii with three hospitals on the island of Oahu, one hospital in Kauai, and with a particular strength in women and children’s services.

Ahead of the deal, HPH received upgrades to A-minus from BBB-plus from Standard & Poor’s and A2 from A3 from Moody’s. Fitch Ratings rates Hawaii Pacific Health A-minus. Outlooks are stable.

“The raising rating reflects our view of HPH’s strong business position and sound management team,” said S&P analyst Geraldine Poon. “Although the system has routinely generated positive operations, the year-to-date performance in fiscal year 2012 has been particularly strong in our view.”

While there is a $100 million debt issuance planned in fiscal year 2014, S&P analysts said they expect HPH has the capacity to absorb that amount at the A-minus rating level should current trends hold and HPH’s market position remains steady.

Outstanding debt following the pricing will total $384 million, of which $334 million is rated debt, according to the Moody’s report. The series 2013 bonds increase HPH’s debt load by 46%.

Moody’s justification for its upgrade was based on its “expectation that HPH will successfully execute its capital plan, generally maintain good market position, continue to produce appropriate coverage of its debt obligations, and rebuild its balance sheet measures.”

The healthcare provider’s challenges include execution risk related to the project, a generally difficult operating environment in Hawaii, a large unfunded pension obligation measuring $194 million in fiscal 2012, equal to a funded ratio of 53%, and the planned reopening of a competing hospital in 2014, according to Moody’s report.

HPH’s operating performance improved sharply in 2012 and through the 11 months ended May 31, 2013, according to the Fitch report. The improvement reflected stronger volumes, good rate increases, and effective cost management.

The volume increases have been driven, in part, by the December 2011 closure of one of its competitors, Hawaii Medical Center – West. HMC was acquired by the next leading provider in the state, Queen’s Health Systems, and the facility is expected to reopen in Spring 2014.

Orrick, Herrington & Sutcliffe will act as bond counsel with San Diego-based Hammond Hanlon Camp acting as the financial advisor.

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Healthcare industry Hawaii
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