CHICAGO - Indianapolis-based Clarian Health Partners Inc. will begin today converting up to $701 million of insured auction-rate securities into weekly variable-rate demand bonds supported by standby bond purchase agreements and letters of credit.

In total, Clarian will convert up to 11 auction-rate series - all of which carry insurance from Financial Security Assurance Inc. or MBIA Insurance Corp. - into weekly variable-rate demand obligations. After the transactions, about 50% of Clarian's total $1.4 billion outstanding debt portfolio will be structured in the variable-rate demand mode.

The transactions come as the six-hospital system moves forward with a scaled-down capital plan that includes spending $2 billion over the next five years, a plan that some analysts warn could strain the system's already above-average debt burden.

The Indiana Health and Higher Educational Facilities Authority is the conduit issuer for the upcoming conversions, and it will be the agency's largest transaction so far this year.

Starting today and continuing Thursday, Clarian will convert two 2005 auction-rate series, both for roughly $80.6 million, to weekly variable-rate demand bonds that will carry two standby bond purchase agreements with Dexia Credit Local.

Merrill Lynch & Co. is the remarketing agents for today's conversion, and Citi will remarket Thursday's 2005B bonds. The ARS being remarketed this week all carry insurance from FSA and will continue to do so.

Based on the FSA coverage and the liquidity support from Dexia, Fitch Ratings assigned a AAA long-term rating and an F1-plus short-term rating to the two series. As well, Fitch assigned an A-plus with a stable outlook to the system's remaining $1.4 billion of outstanding debt.

In advance of the upcoming bond conversion, Moody's Investors Service assigned an A2 unenhanced and underlying rating with a stable outlook to Clarian's outstanding debt. As of yesterday, Moody's had not yet reviewed the letter of credit agreements.

Of the remaining auction-rate debt, Clarian is expected to soon convert another $175 million of FSA-insured auction-rate bonds to a weekly variable-rate mode secured by a SBPA from Dexia.

Another $365 million of auction-rate bonds, originally issued in 2003 and insured by MBIA, will also be converted to the variable-rate mode and secured by letters of credit. Representatives from the hospital and its financial team did not return phone calls, and it was unclear who would provide the letters of credit supporting the bonds.

Clarian is not expected to terminate any of its swaps as part of the conversions. As of Dec. 31, 2007, Clarian had $733 million in fixed-payer swaps, $712 million in fixed-receiver swaps, and $500 million in a constant maturity swap. Noting that the system has an "extensive" swap program, Moody's analyst Lisa Martin wrote that although Clarian has a strong liquidity position, "we believe a program of this size poses risks relating to events which would require termination or collateral postings."

Clarian enjoys a 33% market share in its main service region, which includes downtown Indianapolis and the eight-county surrounding area. It faces several large system-based competitors, including Ascension Health, the largest not-for-profit health care system in the U.S. Analysts noted that its main credit strength is its strong cash position, which translated into 183 days cash on hand and provided 89% coverage of debt.

The system's operating cash flow has been growing over the last few years - supported by the recent opening of two hospitals in suburban Indianapolis - but the system will require sustained growth in margins and cash flow to support its future debt levels, said Martin.

Management recently scaled back its capital program, but its spending plan exceeds $2 billion over the next five years. Clarian's 5.6 times debt-to-cash flow already is higher than the median of 3.3 times for health care systems rated A2 by Moody's.


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