BRADENTON, Fla. - Buoyed by a rating upgrade, University of Kentucky officials plan to competitively price $281.7 million in new and refunding bonds next week for the institution's thriving UK HealthCare system.
Standard & Poor's raised UK’s general receipts bond ratings Tuesday to AA from AA-minus in part because of increasing enrollment at the state’s flagship university and diversity aided by the health care system, which accounts for roughly half the university's revenue.
The new AA rating applies to Tuesday’s pricing of the new and refunding bonds.
Moody's Investors Service affirmed its Aa2 rating ahead of the deal, and said its rating “reflects the solid performance” of UK’s highly integrated academic medical center.
Both agencies assign stable outlooks.
The offering will be issued in three series: $148.9 million of 30-year new money revenue bonds, $110.7 million of refunding bonds, and $22.05 million of refunding bonds.
New bond proceeds will go toward the completion and upgrade of various facilities at UK HealthCare’s Chandler Hospital, which includes the Kentucky Children’s Hospital.
The refundings are being sold as Series B and C bonds for savings within existing maturities, and will refinance bonds originally sold in 2006 and 2007 to finance health care facilities.
A minimum of 5% net present value savings will be required to complete pricing of the refunding bonds, according to UK HealthCare senior vice president and chief financial officer Murray Clark.
The transaction will offer investors a variety of maturities and block sizes, and bidders can combine serial maturities into term bonds.
All three series of bonds are structured to achieve level debt service, and to support future financing plans, said Clark.
He also said the university is happy about S&P’s rating upgrade, which brings it in line with Moody’s ratings.
“We hope that it will help with pricing the bonds,” Clark said. “We always have a strong presence in the market, and I think that could be an additional positive indicator of our strength.”
Clark said the health care system is doing well financially, and has benefitted from the fact that Kentucky adopted the full provisions of the Affordable Care Act, including an expansion of Medicaid to include poor working families that previously did not qualify for coverage or subsidies through the marketplace.
“That’s been extremely positive for us converting most of our charity care to coverage,” he said. “We’ve gone from having 12.5% of our patients receiving charity care to 2%. It’s providing significant funds for us to provide care.
“Not only do we have coverage and financial resources for many patients we were already treating, we’re being told by patients now that did not have health care coverage that they will seek the care they needed in the past,” he said. “Unlike a lot of health systems, we now have demand for services that we’re struggling to meet.”
UK HealthCare operates two hospitals under joint accreditation and two licenses in addition to ambulatory services.
The system includes Albert B. Chandler Hospital, Good Samaritan Hospital and the Kentucky Clinic in Lexington. Combined, the hospitals have 945 licensed beds in addition to a network of outpatient sites and clinics.
S&P analyst Ken Rodgers said the agency’s ratings reflect the UK’s strong governance and management.
As Kentucky's flagship higher educational institution, the university “enjoys the state's support for its operations, albeit declining, and some capital needs supplemented by very strong philanthropic support,” he said.
“UK, although at the moment getting a lot of attention for its undefeated basketball team as the March madness national conference playoffs are underway, is in our view increasingly being recognized for its role as a comprehensive research-based university that according to management now pulls almost 40% of its freshman students from out of state,” Rodgers said.
UK HealthCare is also gaining national recognition for clinical care in a number of disciplines including its Markey Cancer Center that in 2013 was designated by the National Cancer Institute as a comprehensive cancer center, one of only a very limited number of such centers nationally, S&P said.
The health system has demonstrated strong growth, Moody’s said in a March 12 rating report.
“Management reports that fiscal 2014 hospital occupancy was in excess of 80%, leading to capacity constraints in some areas,” the rating agency wrote.
The university has also seen growth in enrollment with 27,560 full-time equivalent students in the fall of 2014, and has maintained consistently good operating cash flow with an 11.6% margin at the end of 2014, according to Moody’s.
While UK HealthCare has a challenging payor mix with high Medicaid exposure that is 25% of gross revenues, Moody’s said the system has benefited from the February 2014 expansion of the Kentucky Medicaid program under the ACA, which has resulted in reduced charity care and bad debt expense.
“The stable outlook reflects our expectation that operations will remain positive and that future borrowing will be manageable given amortization of existing bonds,” said Moody’s analyst Mary Kay Cooney.
On March 9, Gov. Steve Beshear signed a bill authorizing debt service to be paid from the state’s general fund on $132.5 million in bonds that will be issued for the construction of the $265 million facility at the University of Kentucky. The university will match the other half of the funding through the research awards and private fund-raising.
The funding will be used to build a state-of-the-art medical research facility that will target diseases that disproportionately affect residents of the Commonwealth such as cancer, diabetes, and cardiovascular disease.
The University of Kentucky was last in the market in June to sell $99.7 million of general receipts refunding revenue bonds.
Morgan Stanley was the high bidder with a true interest cost of 2.02%. The bonds priced to yield 0.42% in 2016, to 1.94% in 2021, to 2.8% in 2025.
J.J.B. Hilliard, W.L. Lyons LLC is the University of Kentucky’s financial advisor.
Peck, Shaffer &Williams, a division of Dinsmore & Shohl LLP, is bond counsel.
