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University of Wisconsin Hospitals Set Sale with Moody's Boost

CHICAGO — The University of Wisconsin Hospitals and Clinics Authority hits the market Wednesday with a $263 million offering that will nearly double its modest debt levels to help finance a five-year, $670 million capital program that includes a major new off-campus facility.

The deal includes some refunding bonds but about $225 million represents new money, said chief financial officer Mike Buhl.

The system will refund some 2008 and 2009 debt for savings and to shift some floating-rate securities to fixed rate. It will also fund a swap termination payment.

JPMorgan is the senior manager and Bank of America Merrill Lynch is the co-senior. Kaufman Hall is the financial adviser and Quarles & Brady LLP is bond counsel.

Ahead of the sale, the Madison-based health system won an upgrade from Moody’s Investors Service to Aa3 from A1.

Moody’s cited the improved balance sheet even with the additional debt load. The outlook is stable.

Standard & Poor’s, on the other hand, affirmed the system’s A-plus rating but revised its positive outlook to stable. After the sale, the system will have about $400 million of rated debt.

“Of course interest rates continue to be reasonable so it is a good time to go to market, but the impetus is our new facility,” Buhl said.

Construction is slated to begin this spring on the $215 million 60-bed acute care facility to house a major orthopedic treatment center and offer an array of outpatient services.

The project is aimed at broadening the location of its services and easing strains on capacity at its main campus. A new off-campus digestive health center will open this spring.

“We’ve been growing at our main campus and have capacity constraints and need to decant which will provide easier access for some services. Long-term it should be more cost-effective,” Buhl said.

Capital projects will be funded with a mix of debt, cash flow and contributions.

The system has not publicly issued new debt in recent years as it sought to focus its attention on improving operations and its balance sheet and fine-tuning its capital program.

“We wanted to position ourselves to get the best rate when we were ready to get into the market,” Buhl said of the strategy.

Standard & Poor’s acknowledged the system’s stronger operating performance and cash flows that provide solid coverage of debt service and liquidity, but the additional debt tempers those strides.

“In our opinion, despite strong operations, a higher rating is precluded at this time due to the ultimate sizing of the Series 2013 bond issue, which roughly doubles the outstanding debt and dilutes some of the key balance-sheet metrics at a higher rating level, coupled with an elevated capital spend forecasted over the next five years,” said analyst Stephen Infranco.

The agency added that it’s comfortable in its assessment that UWHC can absorb the additional debt at the existing rating level.

Moody’s said the upgrade and current rating level reflects “UWHCA’s renowned clinical reputation and unique role as Wisconsin’s only academic medical center supporting strong demand and a growing market position, consistent trend of strengthening financial performance … and still moderate pro-forma debt levels.” The agency had attached a positive outlook to the credit in September 2011.

The system draws patients from beyond its region throughout Wisconsin and from other states, producing a 2% rise in inpatient admissions in fiscal 2012. Operating cash flow more than doubled to $151 million for a 12.6% margin in fiscal 2012 from $86 million in 2009. Results for the first six months of fiscal 2013 show a 10.7% operating margin.

Unrestricted liquidity stood at $618 million in fiscal 2012 providing 214 days cash on hand, up from 131 days in fiscal 2009. The figure was up to 225 days as of Dec. 31.

While the new issue will double the system’s debt load, its leverage metrics remain modest and manageable with maximum annual debt service coverage at 7.3 times, according to Moody’s.

The system also benefits from strong demographics in Madison and Dane County and its payor mix is favorable with less than 43% of patient revenues reliant on Medicaid and Medicare reimbursements.

The system faces challenges in funding and managing a large capital program, competition from several other hospitals in the area, changes in a key insurance contract that could temper volumes, and a new Academic Advancement Agreement with the University of Wisconsin’s School of Medicine and Public Health.

That agreement “may temper further financial strengthening as incremental funding can require the transfer of profitability above certain financial target levels,” Moody’s warned.

The system has a 60% ownership in the Unity Health Plan, which can pose a challenge because its performance can temper the system’s profitability. Standard & Poor’s called the system’s interest in the plan a positive credit factor given growth of 50% over the past 18 months to 140,000 members.

UWHC’s main campus houses a 530-bed hospital. It does not operate as a unit of the University of Wisconsin but maintains a longstanding affiliation and serves as the primary teaching facility for its medical school. A children’s hospital is also located on the main campus.

UWHC is party to three floating- to fixed-rate swaps. Two have a total notional amount of $46.6 million with JP-Morgan as the counterparty.

The third has a notional amount of $53.7 million and is with Goldman Sachs Group Inc.

The hospitals system will terminate $23.8 million of the Goldman Sachs swap in the upcoming sale with an estimated make whole payment of $2.6 million, according to Standard & Poor’s.

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