San Francisco-based Catholic Healthcare West, which operates 40 hospitals throughout California, Nevada and Arizona, is planning a $645 million new-money and refunding deal next week.
Fitch Ratings assigned a long-term rating of A-plus to the revenue and refunding bonds.
The California Healthcare Facilities Financing Authority will issue $367.6 million of fixed-rate revenue bonds in Series 2011A and $150 million of variable-rate demand bonds in Series 2011B. The Arizona Health Finance Authority will issue $126.9 million of fixed-rate revenue bonds in Series 2011B.
JPMorgan and Citi are the underwriters.
Catholic Healthcare West plans to use the proceeds to expand, upgrade, and renovate facilities in six California locations and two Arizona ones.
The two biggest projects are a 226,720-square-foot expansion at the Marian Medical Center in Santa Maria that will add 56 beds, and the construction of the four-story 150,000-square-foot Sequoia Hospital in Redwood City that replaces the current building, according to Lisa Zuckerman, vice president in treasury services for CHW.
The primary focus for renovations and modernization is on emergency room and intensive care units, because the growth in hospital traffic has been in ambulatory services, she said.
“We do a significant review of what we are spending capital on that takes into account the needs of that particular community,” Zuckerman said. “For instance, Mercy Hospital [in Los Angeles] has leading cardiovascular services, so we are expanding that service line there. We may not do cardiovascular in every market we have. We look to what strengths we have and what the market needs are.”
The nonprofit hospital system also has been investing a great deal in technology, particularly related to health documentation, but uses the proceeds from tax-exempt bonds on brick-and-mortar projects, Zuckerman said.
The system hopes to benefit from current low interest rates to refund some outstanding bonds and to refinance a draw on a taxable line of credit, the proceeds of which were used to pay in full and defease bonds issued by CHFFA, according to authority documents.
The proceeds of 2004 bonds were used to refinance the cost of certain capital improvements and equipment acquisitions at various facilities located in California, documents said.
The nonprofit expects to achieve $15.109 million in savings from the refunding, according to the authority’s report.
Retail pricing on the bonds is scheduled for Oct. 25 and institutional pricing is slated for Oct. 26, but Zuckerman said it’s a little too early to say how the bonds will price.
“We are hoping to price fairly competitively,” she said. “Investors have a fair amount of confidence in our name and feel they are getting good information.”
Despite the stable outlook, Fitch analysts said they had concerns that CHW’s operating environment may be challenged by the lingering effects of California economic issues, and by the expected termination of supplemental reimbursement programs due to occur in 2014 with implementation of health care reform.
High unemployment rates have resulted in a slowed rate of growth, with only a 1% increase in admissions for the past two years, down from 2% growth, Zuckerman said.
Given the size and scope of CHW, the $350 million of new money is a small amount for the nonprofit, according to Zuckerman.
“As a rule of thumb, most hospital systems expect to spend a greater amount on capital expenses then they have in capital depreciation each year,” she said.
This past year, she added, the system spent $595 million on capital expenses compared to $430 million in depreciation expense, which is about 140%.
