CHICAGO - In a move that will refinance much of its auction-rate securities, Cincinnati-based Catholic Healthcare Partners is set to enter the market twice in the next few weeks with a total of $734 million of revenue bonds that includes $100 million in new money.

While the system will leave about one-third of its ARS outstanding, the refundings are aimed at bringing down interest expenses that cost CHP $4.7 million more than expected during the first three months of the year.

The transactions come as the provider continues to adjust to its recent acquisition of a financially struggling, four-hospital system based in Tennessee that Moody's Investors Service analysts warn is now the system's greatest challenge.

On Thursday, CHP plans to sell $357 million of hospital facilities revenue bonds in five fixed-rate tranches. The bonds will sell through Lorain County, Ohio, and the proceeds will be used to refund auction-rate securities.

On May 12, CHP plans to sell $377 million of variable-rate demand bonds, of which roughly $277 million will be used to refund ARS. The other $100 million represents new money that in part will finance construction of a replacement hospital in one of the system's six Ohio markets in what likely will be the health care giant's last new-money issue for the next few years. The bonds will sell through Allen County, Ohio, and the Knox County Health, Educational and Housing Facility Board in Tennessee.

Fitch Ratings and Standard & Poor's rate the system's debt AA-minus. Moody's rates the bonds A1. Moody's and Standard & Poor's revised their outlooks to negative late last year when CHP announced it would acquire Baptist Health System of East Tennessee.

One of the largest nonprofit health care providers in the United States and the largest in Ohio, CHP runs more than 100 facilities - including 29 hospitals - across five states. The provider is nearing the end of a five-year, $1 billion capital plan and expects to halt new-money borrowing over the next two years. While CHP suffered an unexpected drop in revenue in 2006, the system has since improved its performance through 2007 and early 2008.

The system has about $1.85 billion in total debt, of which $912 million is currently in the auction-rate mode. The upcoming sales will refinance about $636 million of those ARS. The auction-rate market has imploded in recent months, resulting in numerous failed auctions.

Officials expect the move to bring down interest expenses, which for the first three months of fiscal 2008 came in at $4.7 million higher than expected. While the provider budgeted $21.5 million for interest expenses for the first three months of 2008, final costs came in at $26.2 million, said Jerry Judd, CHP's vice president, treasury.

Despite the rising costs, CHP plans to leave about $275 million in auction-rate debt in place - in part because that debt failed at lower interest rates, around 5%, than the rest of the ARS - and watch how the market performs over the next several months, Judd said.

"Obviously, we're taking out two-thirds of our exposure, so we feel the market is very damaged at a minimum," he said. "We're addressing the majority of it and it's a significant portion for us. We'll continue to evaluate the auction-rate market and consider various options in the future, depending on how that market evolves."

JPMorgan and Banc of America Securities LLC are co-senior managers on both transactions, and Peck, Shaffer & Williams LLP will act as bond counsel.

The fixed-rate bonds will come with insurance while the variable-rate demand bonds will be supported by a letter of credit, Judd said.

Of the $357 million of ARS that will be refinanced into fixed-rate debt this week, Financial Security Assurance will provide coverage on about $282 million and Assured Guaranty Corp. will insure $75 million of the debt. Both companies insured the original auction-rate debt, issued in 2003 and 2006, Judd said.

"We paid the insurance up front for that transaction," he added. "Our decision was whether to keep it, and in this case FSA and Assured are both triple A, and it's beneficial for fixed-rate conversion from an interest rate perspective."

In its second transaction, CHP plans to enter the market May 12 with $377 million in adjustable rate hospital facilities revenue bonds that will be sold in a $302.1 million tranche and a $75.2 million tranche. The bonds will be supported by a letter of credit tentatively from a group of four bankers that will include JPMorgan Chase Bank NA and Bank of America NA.

Like most health care systems trying to refinance out of their auction-rate securities, CHP found it more difficult to obtain letters of credit than in the past, Judd said.

"It's a more difficult environment to access credit, and obviously pricing has gone up - in order to get banks interested you have to pay for it," Judd said. "Also banks are looking to broaden relationships beyond credit, though there is still that separation between credit and other services."

The variable-rate demand obligation issue will include a "modest" extension of final maturities - by about five years - from the original bonds, said Andrew Spohr, a corporate director at CHP.

The remaining $100 million in new-money will be used to partly finance the construction of a replacement hospital located in Tiffin, Ohio near Toledo, one of the system's largest markets. Another piece of the money will be used to replace major radiology and laboratory equipment, Spohr said.

The bonds are an unsecured obligation of the corporate parent, and the affiliates are not directly responsible for payments - a structure that Moody's analyst Lisa Martin warned is "a weaker legal structure than a joint and several structure, where all operating entities are legally liable for debt."

CHP dominates most of the markets it is located in, but analysts warned of weakening local economies, declining population trends and increasing competition - reflected in flat volume trends at some facilities. More than 80% of the system's cash flow stems from its Ohio markets. The system's biggest challenge, said analysts, is integrating the Baptist system, which suffered a $33 million loss through fiscal 2007. Despite the losses, CHP officials have budgeted for Baptist to break even by the end of 2008.

"Maintenance of the rating will depend on meeting or exceeding the 2008 budget target, fully integrating the Knoxville operation, and improving days' cash on hand to the levels achieved in previous years," wrote Standard & Poor's analyst Liz Sweeney in a report on the upcoming bond sales. "Failure to meet budget, unexpected surprises in the Knoxville integration, or continued depressed liquidity levels will result in a lower rating in the next 12-18 months."

Meanwhile, officials are "exploring alternatives" for how to handle Baptist's $135 million in outstanding debt. As it stands, the bonds remain an obligation of the Baptist's obligating group members, which remain separate from CHP, according to bond documents. In March, CHP borrowed $42.4 million from JPMorgan to redeem a series of 1996 bonds held by Baptist.

After completing the two transactions, CHP doesn't expect to borrow again until 2009 or 2010, said Spohr, unless refunding opportunities arise or the system opts to refund its remaining ARS.


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