DALLAS — Children's Hospital of Colorado is to raise $200 million for new facilities this week through deals combining fixed-rate bonds and direct placement of variable-rate debt.
The $75 million fixed-rate portion, issued under the name of the Colorado Health Facilities Corp., is expected to price Wednesday through negotiation with JPMorgan.
"We're hoping for a good, strong market," said Jeff Harrington, chief financial officer for Children's.
The direct placement will go to Wells Fargo and US Bank under terms that were still being discussed Friday.
"We wanted some variable-rate debt," Harrington said. "Our finance committee thought that would be a good opportunity."
Children's also has $63.6 million of series 2008A direct-placement bonds with Compass Bank and $50.4 million of 2008B variable-rate demand bonds that have a letter-of-credit rating based on U.S. Bank National Association. The series 2008B LOC expires in September 2014.
Financial advisor Christopher Payne from Chicago-based Ponder & Co. said that, despite the collapse of auction-rate securities, bond-insurance ratings and issues surrounding letters of credit since 2008, variable-rate remains an attractive source of capital.
"We've been doing variable-rate since 1981 for hospitals," Payne said. "The bottom line is that everyone thought interest rates were going up, but they really haven't gone up. Variable-rate debt has proven a very attractive for more than 30 years."
Use of direct placement has become very common because of shifts in the market, offering a lower cost proposition than letters of credit, Payne said.
"Typically, a health care system will have a relationship with banks already and if they don't, we can recommend some," he said.
Payne, who is working with Children's for the first time on this deal, has served as financial advisor for more than 300 financings totaling more than $15 billion. He has worked for Ponder, a specialist in health-care finance, since 1981.
"We specialize in health care finance, but we are not health-care specialists," Payne said. "I don't know how to run a hospital. I know how to finance a hospital."
Bond counsel Robert Irvin of Kutak Rock also has a deep background in hospital finance. Irvin serves as bond counsel for the University of Colorado Hospital Authority and Denver Health and Hospital Authority.
The bonds carry long-term ratings of A-plus from Standard & Poor's and A1 from Moody's Investors Service with stable outlooks.
"The A-plus rating reflects our view of Children's Colorado's excellent enterprise profile, including a strong position in Denver and Colorado, good cash flow, and solid unrestricted reserves," said Standard & Poor's credit analyst Suzie Desai.
Proceeds from this week's deal will take out short-term debt for facilities at the six-year-old hospital at the Anschutz Medical Campus in Aurora, the redeveloped site of the former Fitzsimons Army Hospital.
Funds will also go toward the Children's South Campus. The facility in the Highlands Ranch neighborhood to the south of Denver is scheduled to open at the end of the year.
The South Campus will be equipped for 80,000 patient visits during its first year. The approximately 175,000-square-foot facility broke ground last year on 22 acres near the C-470 highway that loops the metro area.
"The southern communities along the Front Range have continued to grow at a rapid rate, particularly attracting families with children," said Jim Shmerling, president and chief executive of Children's Colorado.
Children's has become a major anchor at the Anschutz Campus, named for Denver philanthropist Philip Anschutz and his family. Children's moved from its former site in the Capitol Hill area of Denver in 2007 along with the University of Colorado Health Sciences Center.
The redevelopment of Fitzsimons has brought a major economic revival to the old section of Aurora that had become a haven for cheap motels and aged apartment complexes on the eastern border of Denver.
The next major development at the Anschutz Campus will be a $1 billion Veterans Administration hospital scheduled to open in 2015 but fraught with cost overruns and disputes between the federal government and the builder Kiewitt-Turner. According to a report from the Government Accountability Office, the new VA hospital has cost about $500 million more than expected.
Children's completed its hospital at a cost of about $600 million in 2007, relocating its entire operation from downtown Denver where it had been for nearly 100 years.
Total investment in the Anschutz Campus, not counting the VA hospital, has surpassed $2 billion, according to Moody's.
The University of Colorado's new hospital cost about $646 million and the University of Colorado School of Medicine cost about $935 million.
Children's began a $220 million expansion of its new hospital in Aurora in 2010, adding a 10-story patient tower providing 124 additional beds, and shelled space with room for another 72 beds. That project was funded from bond proceeds of $55 million, cash flow of $105 million over two years and $60 million to be donated by the hospital's foundation.
Harrington called Children's move to the Anschutz Campus "a raging success."
Since that move, the health-care sector has undergone dramatic change with the passage of the Affordable Care Act that includes an expansion of Medicaid coverage to a larger segment of the working poor.
While Republican governors in nearby states such as Texas and Oklahoma rejected federal funds to expand Medicaid coverage, Colorado Gov. John Hickenlooper, a Democrat, welcomed the additional funding.
Currently, more than 670,000 Colorado citizens are enrolled in Medicaid, with 60% being children and 18% being the aged or individuals with disabilities, according to Charles Brown, president of Charles Brown Consulting and director of the Colorado Futures Center at Colorado State University. Brown's company conducted a study of how Medicaid expansion for the Colorado Health Foundation.
"The decision to expand Medicaid, largely because of the significant inflow of federal funds to the state, will have a positive impact on the state's economy," the report said. "That is, the Colorado economy will be larger as a result of the decision to expand Medicaid."