CHICAGO - Pleased so far with the pricing results on $500 million of new-money, refunding, and restructured bonds that sold last week, Rochester, Minn.-based Mayo Clinic this week will complete the conversion of its $200 million of auction-rate securities.

The well-respected health care system will price two series of variable-rate demand obligations, each for $65 million, tomorrow and Thursday, with Lehman Brothers serving as the remarketing agent. Bank of America NA will provide a standby bond purchase agreement. The bonds will be remarketed weekly.

The VRDOs will replace auction-rate securities sold in 2002. The Mayo Clinic last week converted the other $70 million from the 2002 issue that makes up the auction-rate piece in its $1.7 billion debt portfolio, said Rick Haeflinger, manager of treasury services. The $70 million tranche captured an initial interest rate of 1.60 %. Those bonds too will be remarketed weekly.

The three tranches that had been auctioned every 35 days most recently captured rates of 5.53% - a maximum rate set due to the auction's failure - and 5.18 % and 4.81%. The maximum rate is determined by a formula based on the London Interbank Offered Rate. The hospital saw only one failed auction.

Hospital officials haven't determined the cost of the higher auction interest rates because the calculation is complicated by the better performance of some of the system's variable-rate demand bonds.

While the ARS rates did not spike to double digits as some other issuers saw, Haeflinger said the system had decided prior to its last auction to convert the debt. "I don't like to have failed auctions associated with the Mayo Clinic," he said.

In addition to the converted bonds, the Mayo Clinic last week sold $420 million of new-money and refunding bonds in the form of VRDOs, commercial paper, and one-year term rate bonds. The $150 million of variable-rate bonds - of which $100 million carries a SBPA from Wells Fargo Bank and $50 million carries one from Northern Trust Co. - captured initial rates of 1.60%. Its commercial paper priced at 1.40% and its one-year term bonds captured a rate of 1.68%.

About $230 million refunded fixed-rate bonds that sold in 1998. The system traded in a 5.5% coupon on the original debt. Another $100 million provided new money for various projects at Mayo's main campus in Rochester. The $330 million sold through that city.

Another $90 million was sold for Luther Hospital to finance construction of a new tower at the hospital in Eau Claire, Wis. The hospital is a wholly owned subsidiary of Mayo and the clinic guarantees repayment of the debt. The $90 million sold through the Wisconsin Health and Educational Facilities Authority. Lehman is the underwriter and remarketing agent on all the transactions.

The clinic has $1.2 billion of floating-rate exposure in its overall $1.7 billion debt portfolio. As the system's finance team worked on their borrowing plans, they made several changes given the current turmoil in the market as a result of the credit crunch.

They added Lehman as a remarketing agent where previously only Morgan Stanley managed their floating-rate debt. "We just felt that our variable-rate exposure was big enough that we wanted two remarketing agents," Haeflinger said. With two in place, the system can better judge one's performance.

The clinic also originally contemplated issuing the debt for Luther using a fixed-rate structure but shifted to a one-year term bond structure. "We are hoping the market straightens out over the next year," he said. The system used Shattuck Hammond Partners as financial adviser and Dorsey & Whitney LLP as bond counsel.

Moody's Investors Service affirmed the system's Aa2 long-term rating and Standard & Poor's affirmed its AA rating last week. The system's strengths include its top-notch international clinical reputation, continued liquidity growth, and successful fundraising.


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