CHICAGO - With an upgrade in hand, Advocate Health Care Network - the Chicago area's largest hospital system - enters the market later this week with a mix of $620 million of variable-rate demand bonds and one-year term bonds to refund its auction-rate securities.

The bonds will sell through the Illinois Finance Authority.

The Oak Brook-based system will sell $470 million of variable-rate demand bonds that will be remarketed weekly. The debt is divided into a handful of series carrying standby purchase agreements from JPMorgan Chase BankNA,Bank of AmericaNA, the Northern Trust Co., Wells Fargo Bank, and Fifth Third Bank. Citi is the underwriter and remarketing agent.

Another $150 million is structured to sell as one-year put bonds. Advocate will provide its own liquidity in the event the bonds are tendered at remarketing. Citi,Loop Capital Markets LLC, and Cabrera Capital Markets Inc. are underwriting the transaction. Chapman and Cutler LLP is bond counsel and Kaufman, Hall & Associates is the financial adviser.

The division between the weekly floating-rate bonds and the one-year terms was driven by the swap contracts associated with the auction-rate securities being paid off. The $470 million piece is currently synthetically fixed, while the $150 million is not. "We are matching the swaps. We want to leave all our swaps in place. They haven't been working as efficiently as they have in the past but they still work," said Advocate chief financial officer Dominic Nakis.

Citi served as the lead auction agent on the outstanding issue and Loop was a co-auction agent on a piece. Advocate added Cabrera on the new deal. Loop is a qualified minority- and women-owned firm while Cabrera is a Latino-owned firm, with both based in Chicago. While most large health care systems tend to rely heavily on Wall Street firms, Nakis said Advocate extends its diversity efforts in contracting and business to bond work.

Nakis did not have a figure on the added interest costs incurred by the system since ARS rates began rising late last year and auctions began failing earlier this year as liquidity tightened and investors sought to move their holdings elsewhere amid the overall credit crunch that stems from the collapse of the subprime mortgage market. "It's probably too early to say until we see our quarterly results," he said.

Advocate saw only one of its auctions fail. The maximum interest rate permitted following a failed auction was 15%. In February, Advocate averaged rates around 8.25% at weekly auctions while in March that figure declined to about 7.25%. The rates have settled more recently in the 5% range. Ambac AssuranceCorp. had insured the ARS.

Once the transaction is completed, Advocate's overall debt portfolio of $770 million will include 10% of traditional fixed-rate debt, 60% of floating-rate debt that is synthetically fixed, and 30% of straight floating-rate debt.

As part of the credit reviews of the upcoming transaction, Advocate won an upgrade to AA from AA-minus from Fitch Ratings. Standard & Poor's rates the credit AA and Moody's Investors Servicerates it Aa3.

Fitch attributed the upgrade to Advocate's low debt burden, strong liquidity, and leading market position of 13.7%. Advocate's unrestricted cash and investments totaled $1.8 billion at the close of last year, providing 220 days cash on hand and a strong 232% cash-debt ratio. Advocate operates seven acute care hospitals in Chicago and suburbs. The system generated total revenue of $3.45 billion in fiscal 2007.

Its market position has grown due to the system's acquisition over the years of existing hospitals and it is currently in negotiations to acquire the 249-bed Condell Medical Center- a union that Fitch analysts said they viewed favorably. If the two merge, Advocate would likely refinance Condell's $125 million of debt.

Credit concerns include tough competition from other top clinical and academic hospitals and increasing state scrutiny of the level of charitable care provided by not-for-profit hospitals in exchange for their exemptions from various local and state taxes.


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