CHICAGO – Ohio-based MetroHealth heads into the market Tuesday with a $915 million deal after a series of investor presentations that officials hope sway investors who might be worried about recent downgrades and possible federal healthcare reform.
MetroHealth, which was established by Cuyahoga County as a public health system to serve the Cleveland region, is selling $915 million Tuesday through the county. The deal will refund debt and add $800 million to the system’s balance sheet to fund a $950 million transformation of its main campus following a sweeping overhaul of its operations.
The big spike in debt prompted Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings to all drop the system’s ratings by three notches leaving it at the lowest investment grade rating. Outlooks are stable at the triple-B-minus level.
The system’s finance team and administrative leaders met with about three dozen potential investors last week in Boston, New York City, and Philadelphia, and continue to hold investor calls.
MetroHealth’s chief executive officer, Akram Boutros, said the team saw broad interest from buyers with positive feedback on both the system’s story relating to its transformation plans, essentiality to the Cleveland area, and bond structure.
The structure capitalizes interest and delays principal repayment to give the system breathing room to complete its physical renovations and includes county support in the form of a credit facility that will serve as a debt service reserve.
Bondholders welcomed those pieces of the MetroHealth story, Boutros said. Dixon Hughes Goodman LLP provided a feasibility study concluding that the system can meet its operational, capital, and debt service needs.
The bond structure was “designed to mitigate finance and business risk,” said MetroHealth Chief Financial Officer Craig Richmond.
The system heads into the market with fresh headwinds from the House’s passage last week of the American Health Care Act, which would replace President Obama’s Affordable Care Act. For a system like MetroHealth that has benefited from a reduction of uninsured patients due to the ACA’s Medicaid expansion, changes could hurt its balance sheet. About 40% of its patients are Medicaid participants.
MetroHealth referenced the risk in a supplement published Friday to its offering statement.
“A substantial portion of the system’s net patient service revenues is derived from Medicaid and any decrease in federal or state Medicaid funding as a result of the AHCA may have a material adverse impact on the system’s operations, financial condition, and financial performance,” the offering statement says.
Market participations will be watching to see if the House passage impacts the deal and other healthcare ones on the calendar.
“The large health-care credits (including a nearly $1 billion deal out of Cuyahoga County, Ohio) slated for the week will be very interesting to watch given the recent Congressional action on the Affordable Care Act on Thursday,” Court Street Group Research LLC said in its weekly commentary published Monday. “While CSG sees no real future for this legislation…watching Speaker Paul Ryan sip Bud Lights in celebration may have an impact on these deals’ pricings.”
Boutros said if Medicaid expansion funding is eventually cut, the system would seek to mitigate the impact on its operations by again applying for a Section 1115 waiver. The U.S. Centers for Medicare and Medicaid approved such a waiver in 2013 for MetroHealth that allowed it to enroll 28,000 in Medicaid and capture more federal matching dollars.
The system knew taking on additional debt would hurt its ratings but officials settled on the replacement of facilities on its 52-acre campus as more affordable than the $1.3 billion tab to repair them.
The bonds are secured by a gross revenue pledge of MetroHealth.
Bank of America Merrill Lynch and JPMorgan are leading the sale. Low-grade healthcare borrowers with large deals have found an eager audience over the last year thanks for demand for yield, but investors will make their decisions based on the system's finances and prospects, said Adam Buchanan, a senior vice president in institutional sales and trading at Ziegler.