CHICAGO — The Michigan Finance Authority is bringing $153.4 million of revenue bonds to market next week on behalf of the Oakwood Obligated Group, a four-hospital system located in the Detroit area.

The bulk of the deal will be refunding. The new-money piece totals $25 million, and will be used to reimburse the system for money it has spent on a new orthopedic surgical center and $5 million for a new project, officials said.

The system expects to achieve a 10% net present-value savings, or around $15 million, with the refunding, said Matt Elsey, Oakwood's corporate controller.

"That was clearly the driver of the deal," Elsey said.

The system will refund bonds originally issued in 1998, 2002 and 2003.

The deal comes as the single-A rated Oakwood Obligated Group, which operates in the highly competitive health care market in southeast Michigan, is seeing steady improvement in its financial position.

Moody's Investors Service affirmed its A2 ratings on the system and Standard & Poor's affirmed its A rating and stable outlook.

Moody's last May revised its outlook to stable from negative, noting the system's improved liquidity and improving cash-to-debt ratio.

Standard & Poor's noted that several factors should strengthen Oakwood's balance sheet this year, including cash generated from next week's bond sale and a recent federal decision that will restore previously denied funding for one of the system's programs.

"We have a relatively positive outlook compared to our historical operating performance," Elsey said. "We expect that the [federal] reimbursement matter will certainly bolster our operating margin and help us improve, and we have a number of growth strategies that we think will help improve inpatient volumes."

Of the system's $324 million of outstanding debt, 95% is in fixed-rate mode. Most of the debt service is front-loaded, and debt service coverage totaled 2.7 times in fiscal 2011, according to Standard & Poor's.

Like most health care issuers, Oakwood is warning that the impact of the new federal health care law on the system's finances remains uncertain.

A bondholder risk section in bond documents includes a lengthy discussion of various aspects of the new law that could affect the system.

Among the top provisions that could negatively affect Oakwood are the expected reductions in Medicare payments coupled with the expected increase of Medicaid.

Hospitals like Oakwood, which serve a high number of uninsured patients, are particularly vulnerable to reimbursement pressures. As of fiscal 2011, Medicare payments made up just under 46% of the Oakwood groups' gross revenues and Medicaid made up 18%.

"Regardless of what happens at the Supreme Court or federal law, we're bracing for it generally by focusing on quality initiatives," Elsey said. "There will continue to be reimbursement pressures, particularly from the governmental payors, and we need to be actively looking at our ability to create efficiencies."

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