DALLAS --Cleveland Clinic Health System heads into the market Tuesday with a $1 billion bond refunding after a one notch upgrade from S&P Global Ratings.
The system expects to price $840 million of tax-exempt and $160 million of taxable, fixed-rate bonds on Aug. 8 that will result in “significant savings”, according to a spokesperson. The bond refunding clears the path for additional debt to be issued to finance a new hospital in central London.
The 2017 bonds will refund all or a portion of series of 2008A, 2008B, 2009A, 2009B & 2012A tax-exempt bonds. The refunding bonds will mature in 2043 and will be issued through the Ohio Higher Educational Facility Commission.
S&P raised the system’s rating to AA from AA-minus as a result of of expansion plans the system has in its U.S. and international operations. Moody’s Investors Service is rating the bonds Aa2.
"The rating action reflects our view of CCHS as it continues to implement a strategic plan that will expand the system in the markets in which it operates in Ohio and Florida, while moving forward with a project for a new private hospital in central London," said S&P credit analyst Brian Williamson.
S&P expects the refinancing of the bonds, from a cash flow savings standpoint, will help to further position the system to possibly issue new debt in support of the London project.
Cleveland Clinic has made no final decision on whether the London hospital project will be funded with equity and/or new debt but said it may incur up to approximately $860 million of debt to refinance a $375 million term loan and fund a portion of the cost of converting and redeveloping the project.
The Cleveland Clinic and the obligated issuers – Avon Hospital, CCHS-East Region, Fairview, Lutheran, Marymount, Medina, Florida Clinic and Florida Hospital -- are proposing to implement an amended and restated master trust indenture (MTI) to update the existing covenants for a borrower of the size and credit rating of the Cleveland Clinic Health System.
Modifications will include the elimination of additional indebtedness tests, the allowance of substitution of notes or replacement MTI without bondholder approval, and a revision of covenant calculations based on the system, according to Moody’s. The changes would be effective for all master note holders under the MTI If approved by the holders of a majority of the outstanding principal amount of the master notes under the MTI, including those issued related to the refunding.
The system operates fourteen hospitals with approximately 3,900 staffed beds. Thirteen of the hospitals are operated in northeast Ohio, anchored by the Cleveland Clinic Foundation. It also operates 21 outpatient Family Health Centers, 10 ambulatory surgery centers, as well as numerous physician offices, which are located throughout a seven-county area of northeast Ohio. In addition, the System operates a hospital and a clinic in Weston, Florida.
The system has maintained solid operating margins, although they moderated in fiscal 2016. The operating cash flow margin declined to 9.7% in fiscal 2016, below historical and expected performance of 11%. The decline was due to volume softness early in the year, increasing pharmaceutical costs, integration expenses related to Akron, and higher pension expense.
However, operating cash flow margins have improved through six months of fiscal 2017 to 10.6% due to a strong rebound in volumes which drove a 5.6% increase in net patient service revenues as well as cost reductions.
Capital spending is projected to increase to about $1.2 billion annually including strategic initiatives, more than double recent spending. Projects will be funded with cash flow and debt.
“In our view, [the system] has some debt capacity that wouldn't preclude us from maintaining the higher rating, but we cannot fully assess the impact to the rating until the final plan of finance affects [the system’s] longer-term financial projections,” said S&P.
