DALLAS — Bearing a healthy prognosis from rating agencies, Children’s Medical Center of Dallas will look for interest-rate savings with a $164.5 million refunding.
Children’s, the pediatric teaching hospital for the University of Texas Southwestern Medical School, issues debt through the North Central Texas Health Facilities Development Corp.
The fixed-rate bonds are slated to price this month through negotiation with Goldman Sachs & Co. as lead manager. They are rated Aa3 by Moody’s Investors Service and AA by Fitch Ratings, both with stable outlooks. The bonds will currently refund Children’s Series 2002 bonds.
The 2002 bonds included $139 million for expansion of the main campus adjacent to Parkland Hospital and $16 million for refunding a 1991 series.
The hospital issued $200 million in 2009, as well. The 2002 bonds were insured by Ambac, and the 1993 bonds were insured by MBIA, both of which had triple-A ratings at the time.
The uninsured refunding bonds are expected to price sometime in the next three weeks, according to Ray Dziesinski, chief financial officer at the medical center.
“We were fairly aggressive in our scheduling, but we decided to delay to put a few more bows on the package,” he said.
Co-managers on the deal are JPMorgan, Estrada Hinojosa & Co. and Siebert Brandford Shank & Co.. The medical center is not using an outside financial advisor.
“This is a very straightforward deal,” said Dziesinski said, who anticipates healthy demand for the debt. The current refunding will save Children’s about $765,000 per year in interest, he said.
At the end of 2011, Children’s had $382 million of long-term debt, representing a low 26% debt-to-capitalization ratio, according to Fitch.
“The AA rating is supported by Children’s solid financial profile, strong market share and status as an academic medical center,” Fitch analysts wrote. “Credit concerns include a high exposure to Medicaid; however, this is typical of all children’s hospitals.”
Situated near downtown Dallas and a new Dallas Area Rapid Transit light-rail line, Children’s is linked to an unprecedented capital expansion of Parkland, UT Southwestern and related facilities.
A $1.3 billion Parkland replacement is rising across Harry Hines Boulevard from the hospital’s existing building. Parkland issued $705 million of Build America Bonds in three series in September 2009 for the 862-bed facility that is expected to open in 2014.
Children’s is completing Tower D this year to provide room for further growth.
The same year as the new Parkland opens, UT Southwestern is expected to open another $800 million hospital that replaces the former St. Paul Hospital.
UT Southwestern last month announced that its new facility will be named for former Texas Gov. William P. Clements Jr., who donated $100 million to the hospital foundation in 2009.
Clements, who died a year ago, served on the search committee that convinced the first president of UT Southwestern, the late Dr. Charles C. Sprague, to come to Dallas in 1967 from Tulane University School of Medicine. Clements and Sprague were classmates at Southern Methodist University in Dallas.
In March, UT Southwestern and Children’s announced a $150 million research partnership to tackle major childhood diseases. Children’s promised to raise $150 million in endowment to support the initiative.
As one of four medical schools in the UT system and one of eight in the state, UT Southwestern is anticipating competition for students and faculty from new schools in Austin and South Texas.
Last week, the UT System Board of Regents approved $30 million a year in funding toward operating costs of a medical school in Austin.
System officials said $25 million in funding would be allocated through the state’s Available University Fund, which is a portion of the Permanent University Fund that wraps certain bond issues for the UT and Texas A&M university systems.
Officials said UT aims to create the new medical school within the next few years. The system pledge is contingent on local fundraising efforts that must provide $35 million in annual funding from undetermined sources.
The UT regents also approved a medical school in South Texas that will require funding from the Texas Legislature when it convenes next year.
Hospitals such as Children’s will be watching the 2013 Texas Legislature for any signals on how funding of Medicaid might be allotted.
Ratings analysts said that primary credit concerns include recently passed reductions to Medicaid reimbursement in the Texas fiscal 2012-2013 biennial budget. Medicaid accounts for 64.6% of Children’s gross patient revenues and about 34% of net patient revenues, making Children’s particularly vulnerable to any cuts to Medicaid reimbursement, according to Fitch.
The Legislature cut Medicaid reimbursement 8% in Texas’ fiscal 2012-2013 biennial budget.
While inpatient services at children’s hospitals were exempted from the cuts, reimbursement for outpatient services is subject to the reduction.
“The stable outlook reflects Fitch’s expectation that Children’s can maintain its current financial profile despite expectations for future pressure on reimbursement rates under the Medicaid program,” analysts wrote.
Children’s, the seventh largest pediatric health care provider in the nation, also has a hospital in the Dallas suburb of Plano. With a 66% share of the Dallas-area pediatric health-care market, the system has 559 licensed beds at its two campuses and maintains 10 outpatient sites.
Total operating revenue for the Dallas and Plano hospitals was $1 billion in fiscal 2011.
The hospital has no plans for additional debt, according to Moody’s. It maintains a defined benefit pension plan that was 59% funded with a liability of $114.6 million, according to analysts.
Children’s contributed $10 million to the plan in fiscal year 2011 and expects to contribute $14.5 million in fiscal 2012. The plan is frozen to new entrants to limit growth of the unfunded liability.
