The California Health Facilities Financing Authority approved issuing $450 million in tax-exempt revenue bonds for Sutter Health System to construct a 70-bed hospital in Santa Rosa, a three-story medical clinic in Sunnyvale specializing in obstetrics and gynecology, and a three-story medical clinic in San Carlos offering urgent care and other services.

Sutter Health has sole responsibility for paying back the bonds issued by conduit issuer CHFFA, whose stated mission is to provide financial assistance to California’s public and nonprofit hospitals.

“I’m gratified Sutter chose this low-cost financing option for projects that will help provide health care for thousands of patients in Northern California,” State Treasurer Lockyer, who chairs the financing authority, said in a prepared statement.

Morgan Stanley, Bank of America Merrill Lynch and Sutter Securities, Inc. are the underwriters.

Sutter, a California nonprofit public benefit corporation, is the parent company of the Sutter Health System, which operates primarily in Northern California. The Sutter Health system includes 31 acute care facilities, two of which are acute psychiatric hospitals, four free-standing skilled nursing facilities and two free-standing chemical dependency recovery hospitals operating with a total of 5,397 licensed beds. The system also includes five medical foundations that contract with medical groups organized as professional corporations that account for the services of 2,499 physicians and physician extenders; and 14 home health care locations.

Sutter requested the financing authority issue fixed or variable rate revenue bonds for $450 million in construction projects already in progress. Approximately $250 million will be used for reimbursements.

The bond proceeds will pay for the $150 million construction of Santa Rosa Acute Care Hospital, a new 70-bed, 125,700-square-foot state of the art replacement acute care hospital, which is expected to be completed in June 2014. They will also pay for the $130 million construction of Sunnyvale Medical Clinic, a 120,000 square-foot, three-story, modernized medical clinic, two floors of underground parking and a two-level parking structure, which is expected to be completed next month. Proceeds will also be used for the $170 million construction of San Carlos Medical Clinic, a 190,000 square-foot, three-story, medical office clinic with multi-speciality, urgent care and an ambulatory surgery center, and four-level parking structure, expected to be completed by July 2014.

The negotiated bonds will be offered as fixed rate bonds issued in minimum denominations of $5,000 and/ or variable rate bonds in minimum denominations of $100,000 and multiples of $5,000 in excess thereof or denominations of $5,000 if issued as put bonds.

Staff recommended the board approve the bond issuance subject to Sutter receiving investment grade ratings. Macias Gini & O’Connell, LLP, the financial authority’s financial analyst, agreed with staff recommendations.

The health care organization anticipates credit ratings of AA-minus, Aa3, and AA-minus from Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings, respectively.

Sutter ’s income statement appears to exhibit solid and strong operating results over the review period from FY 2010 to FY 2012; and its financial strength appears solid with an operating proforma debt service coverage ratio of 4.70 times, according to the staff report.

As of December 31, 2012, the Obligated Group’s outstanding long-term debt totaled approximately $3 billion, of which approximately $1.8 billion (60%) was comprised of debt issued through CHFFA. Following this proposed financing of $450 million and a separate issuance of approximately $300 million in taxable debt, the Obligated Group’s total outstanding debt will equate to approximately $3.75 billion, with the amount of the Authority debt increasing to approximately $2.25 billion, or 60%.

The Obligated Group is the central financing vehicle of credit for Sutter and was formed to facilitate access to capital for Sutter Health and selected Affiliated Entities by unifying the credit of the Obligated Group Members through the Master Indenture.

Sutter Health invested $898 million in capital improvements in 2011 and expects to invest $5.4 billion through 2016, according to financial statements.

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