CHICAGO - Cleveland's University Hospitals Health System today will take retail orders on $101 million of fixed-rate and variable-rate revenue bonds to raise funds for its $1 billion capital improvement plan and to refinance some outstanding debt.
UH will open up the deal to institutional buyers tomorrow. It plans to sell up to $45 million of new money and refinance around $56 million, though both figures could change depending on market response.
The sale comes a few months after the single-A rated health care system sold $175 million of fixed-rate debt at an interest rate of around 7%. "That was in a tougher market," said Frank Taylor of Ponder & Co., the hospital's financial adviser. "This time around UH is going to be a lot more opportunistic in terms of how much it sells and at what rate."
Of the $175 million sold in March, retail investors bought around $70 million, and the finance team hopes today's sale attracts a similar level of interest.
"Retail is so dependent on a variety of factors," Taylor said. "At 7% [interest rates], there tends to be stronger retail interest than at 6%. It's hard to tell from deal to deal and week to week."
Today's sale includes $45 million of fixed-rate bonds and $56.3 million of debt in a variable-rate mode, although it will have longer-term put features of five to seven years, eliminating the need for liquidity.
The Ohio Higher Educational Facility Commission will issue the debt on behalf of the hospital. Merrill Lynch & Co. is lead underwriter on the deal, with Citi, Edward Jones, KeyBank Capital Markets Inc., NatCity Investments Inc., and Wells Fargo Brokerage Services LLC also on the team. Bond counsel is Squire, Sanders & Dempsey LLP.
University Hospitals is the second-largest health care system in the Cleveland area, with a 27% market share in the eight-county region. Its main competitor is the prestigious Cleveland Clinic Health System, which enjoys a 46% market share.
Proceeds from today's sale of new-money debt will finance a series of projects designed to increase UH's market share. The projects include expanding the University Hospitals Case Medical Center campus and its Rainbow Babies and Children's Hospital, as well as building a new 144-bed medical center in a Cleveland suburb.
The proceeds will also be used to refund debt issued in 1996 as well as possibly some variable-rate demand bonds issued in 2008, Taylor said.
About 45% of UH's roughly $900 million total debt portfolio is supported by direct-pay letters of credit or a bank loan or are serial mode bonds, according to Moody's Investors Service. That leaves the system with some bank-related and put exposure, particularly related to term-out provisions in the bank agreements, warned the rating agency.
While UH is enjoying low interest rates on much of its variable-rate debt - around 1.5% to 2% - it may restructure some of the debt to shed some of the bank-related risks, Taylor said.
"Their cost of capital right now is very attractive versus 6% to 6.5%, but they understand that having exposure to the banks is risky as well," he said. "Depending on the interest rates they might refinance some of that debt."
Prior to the March sale, Standard & Poor's lowered its underlying rating on UH's debt to A from A-plus, citing in part the pressure that the new debt issuance could put on the system's balance sheet. The outlook is stable. Moody's maintains an A2 rating on the debt with a stable outlook.
