DALLAS — The University of Colorado Hospital Authority plans to issue $200.8 million of variable-rate revenue bonds this week for a new medical tower on its rapidly expanding Anschutz Campus in Aurora.
The negotiated deal comes with a Fitch Ratings upgrade to A-plus from A based on the hospital’s “robust operating profitability” after consolidating all inpatient clinical service to the Anschutz Medical Campus in mid-2007, according to Fitch analysts Adam Kates and Michael Borgani.
“The benefits of the consolidation at Anschutz have exceeded expectations, and utilization statistics increased across the board,” the analysts wrote in their rating report. “Operating improvements are evidenced by consistently strong operating profitability.”
Moody’s Investors Service issued an underlying rating of A3 and an enhanced rating of Aa1 based on the letter of credit. Although Moody’s did not provide an upgrade, it retained its positive outlook.
“The maintenance of the positive outlook, despite the significant increase in debt and a large strategic agenda, reflects UCH’s continuation of strong operating performance and the recent improvement of its balance sheet,” analysts Brad Spielman and Lisa Goldstein wrote. “Our expectation is that UCH will continue to maintain strong operating performance in support of its increased debt-service obligations.”
This week’s deal will provide half the cost of a $400 million, 12-story tower that will be the second at the Anschutz Cancer Pavilion, providing more in-patient care, additional parking and other services. Funding for the other half of the cost is expected to come from the hospital’s cash flow.
Wells Fargo NA serves as underwriter, letter-of-credit provider and remarketing agent for the bonds. Wells Fargo can resign as LOC provider after five years. Cost of issuance and remarketing is estimated at $830,000 with an underwriter’s discount of $220,913, according to the preliminary official statement.
Kaufman, Hall & Associates serves as financial adviser, with Kutak Rock as bond counsel and Dorsey & Whitney as underwriter’s counsel.
The Series 2011A bonds initially will pay the weekly interest rate until the Hospital Authority decides to convert the bonds to a daily rate, index interest rate, or fixed rate. The weekly and daily rates will be equal to 110% of the SIFMA swap index.
The SIFMA rate averaged 2.57% over 20 years as of last week, according to the POS. The bonds reach final maturity in 2042.
Aimed at financing the explosive growth of the Anschutz campus at the site of the former Fitzsimons Army Hospital, the new bond issue will represent a nearly 40% increase in the authority’s total debt, raising the debt-to-revenue figure to what Moody’s considers a “very high 86%” from an “already very high 62%.”
With the additional debt, about 60% of the agency’s debt is putable, consisting of four series of variable-rate demand bonds, and one $50 million series of long-mode put bonds.
Officials plan to refund the Series 2004B put bonds with cash on their next put date, in September 2012.
The debt-service coverage ratio is adequate at 1.2 times, according to Moody’s.
Along with this week’s deal, the Hospital Authority plans to substitute the liquidity agreements on its three other outstanding variable-rate demand bond issues — Series 2008A, 2008B, and 2004A — with five-year, irrevocable letters of credit from JPMorgan Chase.
Terms of the letters of credit are similar, and include two-year term-out provisions and covenants requiring the maintenance of debt service coverage of 1.25 times, an indebtedness ratio of 0.65, and cash on hand of 90 days.
The authority is also counterparty with Citi to two fixed-payer swap agreements with total notional of around $171 million, according to Moody’s.
Citi holds the right to terminate and compel UCH to pay any negative value on the swap if the rating on the hospital’s bonds falls below Baa1 or if days cash on hand goes below 90 days.
The net termination value of the swaps was negative $25 million as of June 30, 2010. UCH had been counterparty on a $50 million notional fixed-receiver swap that it terminated in September 2009 for a realized gain of about $1.4 million.
Coming just four years after completion of the new Anschutz campus, the new patient tower will supply capacity for 220 additional beds, with a portion remaining vacant or partially completed until needed.
The project will provide new diagnostic and treatment space, and will include the reconstruction and relocation of the current emergency department. The project broke ground last month, and is expected to be completed in March 2013.
Total cost of the project, including parking structures and other elements, is budgeted at $393 million.
The authority is also renovating the Anschutz Cancer Pavilion at a cost of around $20 million. The project began in January and is expected to be completed before year-end.
Located six miles east of the original University of Colorado Hospital near downtown Denver, the Anschutz Medical Campus — named for Denver billionaire Philip Anschutz — represents investments totaling $2.25 billion, consisting of $664 million for UCH, $630 million for the adjacent Children’s Hospital, and $960 million for University of Colorado School of Medicine.
The state has poured heavy investment into the project, and the city of Aurora plans to develop a fixed-rail transit line from downtown Denver to the campus.
The light-rail line is part of the Regional Transportation Authority’s FasTracks project, which includes a massive expansion of rail and bus service by 2017.
“The coordinated development of the site and the significant investment of public and private resources have resulted in a campus that we feel strengthens UCH’s operational, programmatic and strategic integration with University of Colorado School of Medicine, and provides UCH with a strong platform on which to pursue further clinical excellence,” Moody’s analysts wrote in their report.