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Phoenix Children's Hospital Refinancing $284.6M

DALLAS — Amid major changes in health care finance, Phoenix Children’s Hospital will refund $284.6 million of revenue bonds used to build an 11-story tower.

The deal is expected to price Feb. 5 through negotiation with JPMorgan and Bank of America Merrill Lynch as co-senior managers. Melio & Co., based in Northfield, Ill., serves as financial advisor, with Squire Sanders as bond counsel.

The bonds, which reach final maturity in 2042, carry only one rating, a BBB-plus from Standard & Poor’s with a stable outlook. 

Moody’s Investors Service last rated one of the hospital’s deals in 2005, raising the rating two notches to Baa3 from a non-investment-grade Ba2.

“The BBB-plus rating reflects our view of Phoenix Children’s improved pediatric business position as the main provider of higher-acuity pediatric services as well as expanded government funds to support operations and help restrengthen the balance sheet,” said Standard & Poor’s credit analyst Suzie Desai.

Proceeds of the sale will provide $52 million in swap termination fees on variable-rate debt issued in 2007, according to the preliminary official statement.

About $225 million will refinance the remaining Series 2007 index rate bonds, while another $40 million will go toward buying out building operating leases, according to S&P. That is designed to improve future cash flow and operating revenue.

The remainder of the proceeds will go toward a $19.3 million debt-service reserve and issuance costs that are expected to be about $4.7 million.

Phoenix Children’s Hospital broke ground in 2008 on a $538 million expansion designed to raise the hospital’s status to that of a nationally renowned pediatric medical campus.

The hospital is growing from 345 licensed beds to 626 at full build-out, which is expected this year. The tower features expanded clinic space, state-of-the-art operating rooms, pediatric radiology technology, a new pediatric intensive care unit and a separate cardiovascular intensive care unit to support the Children’s Heart Center. Three floors were set aside for future expansion.

Construction costs for the new tower totaled $370 million, $50 million under original budget. The complete expansion cost totals $538 million.

Completion of the tower came as Arizona struggled with the collapse of the housing market that had been the state’s largest employer.

The economic travails brought cutbacks in state funding for education and health care.

Hospitals in Arizona and elsewhere continue to feel the impact of higher unemployment, reduced personal-income earning expectations and diminished access to private insurance.

Patient service revenues and inpatient volumes have not increased as historic trends would otherwise indicate, according to the hospital.

Unemployment rates are at historical highs, resulting in increases in self-pay admissions, increased levels of bad debt and uncompensated care, and reduced availability and affordability of health insurance, the POS noted. “State budgets are under increased stress, potentially resulting in reductions in Medicaid payment rates or Medicaid eligibility standards and delays of payment of amounts due under Medicaid and other state or local payment programs,” it said.

In her state of the state address opening the 2013 Arizona Legislature earlier this month, Gov. Jan Brewer surprised her Republican colleagues by announcing plans to expand Medicaid under the Affordable Care Act fostered by President Obama.

Brewer has previously criticized the Affordable Care Act and refused to create a health insurance exchange in Arizona.

But Brewer said the state cannot afford to pass up the additional $7.9 billion in federal funds over the next four years from the Medicaid expansion.

Addressing fears that expanded health care would raise costs for state government, Brewer said that “circuit breakers” would be built into the Arizona Health Care Cost Containment System, or AHCCCS, so that if Congress reduces federal subsidies in the future, the state would shrink enrollment.

Arizona hospitals would be allowed to assess fees on themselves to “assure the state general fund bears no cost” in expanding the program.

“I won’t allow Obamacare to become a bait and switch,” she said.

Brewer said the federal government would spend the money across the country anyway, no matter what Arizona decided.

“Saying noto this plan would not save these federal dollars from being spent or direct them to bringing down the deficit,” she said. “By agreeing to expand our Medicaid program just slightly, we will protect rural and safety-net hospitals from being pushed to the brink.”

In another legislative proposal that could affect Phoenix Children’s Hospital, House Bill 2293 introduced by Rep. Steve Smith, R-Maricopa, would require hospitals to confirm the citizenship of children in need of care.

If legal status cannot be verified, someone from the hospital “must immediately contact the local federal immigration office or a local law enforcement agency to report the incident,” the bill would stipulate.

The Arizona Hospital and Healthcare Association opposes the legislation.

“When does this begin or end?” asked Pete Wertheim, the organization’s vice president of strategic communication. “What other industry should be screening their customers for citizenship verification?”

A separate measure, HB2289, would require the state Department of Education to collect data on how many students are not in this country legally.

Federal law, at least as interpreted by the U.S. Supreme Court, requires public schools to educate all children who live within each district, without charge, whether they are in this country legally or not.

Brewer, who made investigation of potential illegal aliens part of her successful election campaign for governor in 2010, has eased off the issue since then.

Arizona experienced widespread boycotts of conventions and tourism after Brewer won passage of a bill requiring police to investigate the citizenship status of people stopped or questioned in unrelated matters.

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