Michigan hospital adds taxable to its debt mix

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Covenant HealthCare's upcoming pricing will help the Michigan-based system lock in savings and reduce its debt portfolio exposure to interest rates.

Covenant is pricing $57 million of tax-exempt refunding bonds and $40 million of taxable new money bonds Thursday. The deal retires some of its 2010 debt and $17 million of variable-rate, term loan bank debt. The new money taxable bond funds will be used to build a rehabilitation facility. This is the system's first taxable issuance.

The system will sell the bonds through the Saginaw Hospital Finance Authority, with RBC Capital Markets as senior manager. Blue Rose Capital Advisors LLC is the advisor. Miller Canfield Plc is bond counsel.

Covenant Finance Director Matt Nobis, in an investor presentation, said the system anticipated more than $10 million in savings from the refunding. Along with the reduction in interest rate exposure, the taxable bonds add diversification to the issuer’s debt portfolio. The system has roughly $93 million in outstanding debt.

“Due to the refunding savings and the debt reshaping the maximum annual debt service is actually slightly less post-financing,” Nobis said. The system expects to decrease its annual debt service to just over $11 million from $12 million as a result, he said.

S&P Global Ratings assigned the bonds an A-plus rating.

“The rating reflects our view of the medical center's leading and consistent business position in a relatively small and economically vulnerable primary service area (PSA), as well as its growing medical staff and strong partnerships with other acute-care providers, which provide Covenant with clinical and strategic support,” S&P said.

The system announced plans to build a $40.7 million rehabilitation center at its main campus in Saginaw, approximately 100 miles north of Detroit.

The building will include 48 inpatient beds, with space for 132, and a state-of-the-art outpatient therapy facility. Covenant will operate the center together with Mary Free Bed, a Michigan-based network of rehabilitation hospitals.

In November 2017, the two organizations signed a partnership agreement creating a 50-50 joint venture for advanced rehabilitation care in Saginaw and the Great Lakes Bay Region. “This partnership should support revenue growth and service line diversification for Covenant,” S&P said.

“One of our goals is to be a leader in healthcare delivery in the region while growing and maintaining our financial position,” Kevin Albosta, Covenant’s chief financial officer said in an investor presentation. “This project does expand our regional presence, supports our trauma centers, and our patient-centric mode helps keep patients and families in our market rather than having to leave Saginaw for services.”

The nonprofit health system, which has more than 4,600 employees and a 642-bed hospital, reported revenues of $663 million in 2019.

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