DALLAS — Denver-based Catholic Health Initiatives expects to sell up to $1.2 billion of revenue bonds with a variety of structures in a multi-state deal tomorrow and Thursday.
The size of the issue could vary, based on how much debt refunding the nonprofit health organization decides to undertake. Pricing begins with a retail order period Wednesday before institutional pricing on Thursday, officials said.
Diane Albrecht, director of capital finance, expects the system to benefit from the current flight to quality in the muni market with lower volume amid strong demand for double-A credits like CHI’s.
“Our bonds have always been favorably received by the market,” she said.
Refinancing is expected to account for about 40% of this week’s issue, an amount that is adjustable based on market conditions. While the market has been favorable to refinancings recently, rates began to move against issuers last week. This week’s estimated $11.3 billion of municipal deals is also the largest weekly volume since June.
For CHI’s deal, the conduit issuer Colorado Health Facilities Authority is expected to sell up to $528 million of Series A and $160 million of Series B revenue bonds.
The Kentucky Economic Development Finance Authority is scheduled to issue up to $398 million. Montgomery County, Ohio, will handle about $159 million.
The Colorado issuance, the largest portion of the deal, will cover hospitals in Nebraska, Iowa, and New Jersey, as well as Colorado.
“We always do multi-state issues,” Albrecht said. “We are fortunate to be based in a state where we have a very effective multi-state issuer.”
While it covers the needs of individual hospitals, the offering represents a system-wide financial strategy.
“It allows us to reset the cash for our balance sheet, to reimburse ourselves for capital that our hospitals have already spent, and it allows us to remain competitive in the market in extending our ministry,” Albrecht said.
Morgan Stanley and JPMorgan are co-senior managers on the negotiated deal. Regional co-managers are Citi, Wells Fargo, Hillyard Lyons, and Edward Jones. Ponder & Co. is financial adviser. Foley & Lardner is bond counsel.
The Series B bonds will all be offered under multi-modal variable-rate documents but function as fixed-rate put bonds with mandatory tenders between 2013 and 2015. The Ohio issue includes $102 million of extendable reset securities eligible for nine-month extensions if the ERS are not remarketed.
“Under favorable market conditions, the entire sale may be fixed rate, with final decisions being made at pricing,” Moody’s Investors Service analysts Kay Sifferman and Lisa Goldstein noted.
The bonds earned double-A ratings from Moody’s, Standard & Poor’s and Fitch Ratings. The ERS carry short-term ratings of A1-plus from Standard & Poor’s, P1 from Moody’s and F1-plus from Fitch.
“The short-term rating on these bonds reflects the liquidity support provided by CHI’s own assets, and related procedures to redeem the bonds as needed while in the ERS mode,” Moody’s analysts wrote
As the second-largest Catholic health care system in the United States behind Ascension Health and the fifth-largest health system overall, CHI operates 78 hospitals in 20 states. It also includes 40 long-term care, assisted-living, and residential facilities. With annual revenues of $8.2 billion, the system provided $536 million in charity care and community assistance in 2008.
Bond proceeds will restructure several series and provide $282 million to Alegent Health, under one of CHI’s joint operating agreements. Proceeds also will reimburse CHI for $446 million of prior capital expenditures, including the acquisition costs of acquiring Saint Clare’s Hospital in New Jersey last year.
The issue comes on the heels of a major effort to convert about $1 billion of auction-rate securities to fixed- and variable-rate modes, according to Albrecht. The system stepped up its bond issuance from about every 18 months to about one deal per year, she said. The last $93 million of ARS will be converted with this deal.
CHI is party to six floating-to-fixed swaps with a notional value of about $965 million designed to reduce interest-rate risk. Standard & Poor’s assigned the health system a debt derivative profile score of 1.5 on a scale of 1 to 4, with 1 representing the lowest risk.
“The overall score of 1.5 reflects Standard & Poor’s view that CHI’s swaps reflect a very low risk at this time,” analysts wrote.
Standard & Poor’s noted CHI’s solid financial management, along with good geographic diversity. However, analysts noted a 22% increase in debt with this deal and “a financial profile that, while sound overall, is only adequate for this rating level, especially in light of investment market declines in fiscal 2009 that weakened unrestricted net assets, liquidity, and pension funding levels.”
“We believe that CHI’s operating performance will continue its improvement as demonstrated in fiscal 2009,” said Standard & Poor’s credit analyst Martin Arrick. “We also believe that CHI will continue to rebuild its balance sheet.”
Moody’s listed a liquidity decline of 11% in fiscal year 2009 as one of the system’s challenges.
Catholic Health has identified more than $3.1 billion in sources of liquidity, including bank lines, and fixed-income and equity assets to guarantee the full and timely purchase price of $1.1 billion of bond issues for which CHI has arranged to provide self liquidity, according to Standard & Poor’s.
Of that amount, $551 million is commercial paper, $117 million is in term bonds with a remarketing date of November 2010, $101 million is ERS, and the remaining $283.7 consists of various series of variable-rate demand bonds with weekly put features.
The pool of assets backing the securities consists of investment-grade securities and domestic equities managed to provide competitive total returns.
In apprising investors of potential risks, CHI included the volatile financial markets that have wreaked havoc on balance sheets for individuals and institutions since 2008.
The bonds are also coming amid a great deal of uncertainty about the future of health insurance as Congress considers major reform measures. At the same time, nonprofit hospitals are facing examinations of their billing and other practices, according to CHI’s preliminary official statement.
Along with closer scrutiny from the Internal Revenue Service on the nonprofit status of hospital systems, “the IRS has also undertaken a community benefit initiative directed at hospitals,” the POS noted.
“The most recent IRS report on this initiative determined that a lack of uniformity in definitions of community benefit used by reporting hospitals ... made it difficult for the IRS to assess whether any particular hospital is in compliance with current law,” it said.