CHICAGO — Cleveland-based MetroHealth System is expected to enter the market today with $75 million of taxable Build America Bonds and possibly another series of tax-exempt fixed-rate debt to finance capital projects.
The deal comes as the Cuyahoga County-owned hospital undergoes a major restructuring under new management aimed at improving operating performance.
The borrowing increase by 40% the hospital’s debt, which, along with a weak regional economy and high Medicaid and self-pay patient load, could strain its balance sheet, analysts warned.
MetroHealth is located near downtown Cleveland and is owned and financed by Cuyahoga County, the most populous and wealthiest county in Ohio.
The county will act as conduit issuer. Morgan Stanley and PNC Capital Markets LLC are underwriting the deal. Tucker Ellis & West LLP is bond counsel.
Proceeds from the bond issue will finance capital projects, according to bond documents. Moody’s Investors Service rates the debt A2 and Standard & Poor’s rates it BBB-plus.
Though the county funds the hospital, it is not obligated to pay its debt service. The bonds are special obligations of MetroHealth and carry a pledge of the system’s gross revenues.
As part of its indenture, the system is required to maintain at least 75 days’ cash on hand as long as the debt is outstanding, and a debt-service coverage level of at least 1.10 times, according to bond documents. If the debt-service coverage levels dip below the threshold, the hospital is required to hire a consultant to recommend boosting it.
As of Sept. 30, 2009, MetroHealth reported 129 days’ cash on hand, a slight dip from 2008, but analysts expect it to remain stable as the hospital faces no large pension payments or capital demands in the near term.
As the county’s safety-net hospital, MetroHealth derives nearly 50% of its patient revenue from Medicaid or self-pay patients. As a result, it depends heavily on the county and state for financing — dependence that could be threatened as both the county and the state suffer from their own financial challenges.
The county — which Moody’s rates Aa1 with a negative outlook — has supplied MetroHealth with $40 million annually from 2007 through 2010 through a pair of voter-supported property tax levies that have been consistently renewed since 1976. The levies are set to expire again in 2010 and 2012.
Despite Cuyahoga’s historically strong commitment to MetroHealth, appropriations could waver as the county faces its own fiscal struggles, Moody’s analyst Lisa Martin said in a report.
“While we believe the county’s support of MetroHealth will continue, we believe future levels of support may be affected by the regional economy, ” she wrote.
Another factor that could affect the hospital’s financing is the county’s transition to an executive-style government. Voters in November approved a measure that calls for the current three-commissioner system to be replaced with a new charter government run by an elected executive and an 11-member council.
After the transaction, MetroHealth will have $271 million of outstanding debt, up from $196 mllion in 2008. Of the $196 million, 36% was originally issued as variable-rate debt. The hospital has entered into a pair of variable-to-fixed interest rate swaps on the debt. While the swaps reduce variable-rate debt risk, MetroHealth still faces some renewal risk from the letters of credit supporting the debt, Moody’s said.