CHICAGO — The Detroit-based Henry Ford Health System will re-enter the tax-exempt market with its first new-money sale in more than 10 years today when it sells $400 million of fixed-rate, new-money and refunding bonds that will be followed with the issuance of $200 million in floating-rate securities in the coming weeks.
The refunding portion will refinance all of the hospital system’s outstanding debt sold in 1992, 1995, 1999, and 2003. The new-money piece will finance a series of capital projects, including the long-planned $275 million construction of a new hospital that had been held up due to litigation.
Plans for the new hospital in West Bloomfield, an affluent area outside Detroit, should help attract investors, according to Thomas Spalding, senior portfolio manager at Nuveen Investments. “That’s where the growth is, and credit-wise it makes them strong. It’s going to help” with investor appeal, he said yesterday.
The Michigan State Hospital Finance Authority will issue the bonds on the system’s behalf. The deal includes a fixed-rate A series for $400 million that is being priced today. The B and C floating-rate series, each for about $100 million, will follow within the next two weeks. The fixed-rate piece is tentatively structured to mature serially between 2007 and 2026 with term bonds in 2031, 2036, and 2046, according to the deal’s offering statements. The system plans to enter into one fixed-to-floating rate swap in conjunction with the sale.
Citigroup Global Markets Inc. is the underwriter with Dickinson Wright LLP serving as bond counsel to the authority. Miller, Canfield, Paddock & Stone PC serves as counsel to Henry Ford and McDermott Will & Emory LLP will serve as underwriters’ counsel.
The bonds are secured by a revenue pledge of the obligated group. The system’s key assets include the 903-bed main campus in Detroit called Henry Ford Hospital and four other acute-care facilities, the Health Alliance Plan of Michigan, the Alliance Health and Life Insurance Co., two nursing homes, the Henry Ford Health System Foundation, and an offshore captive insurance company. The system also partly owns four other hospitals through two joint ventures.
The system’s main hospitals in addition to the flagship facility include the 203-bed Henry Ford Bi-County Hospital in suburban Detroit; the 344-bed Henry Ford Wyandotte Hospital, also in the suburbs; Henry Ford Kingswood Hospital, a 100-bed psychiatric facility; and a small existing facility in West Bloomfield. The obligated group accounted for 86% of the system’s assets, 95% of its revenues, and approximately 150% of the operating income.
Both Moody’s Investors Service and Standard & Poor’s recently affirmed their respective ratings of A1 and A.
“The rating continues to be based primarily on the positive operating trend that Henry Ford has posted over the past couple of years, the system’s distinguished brand, and the diversity of the system’s asset and revenue base,” Standard & Poor’s analysts wrote.The system benefits from a low debt burden and strong maximum annual debt service coverage ratios of 6.8 times. It holds a market share that ranges from 9% to 17% in the southeast Michigan region, and its management team remains focused on dealing with challenges posed by operating in the Detroit area, according to analysts.
The deal will mark the first new-money sale since 1995. The system had about $318.6 million of principal outstanding as of Sept. 30, 2005. Henry Ford had struggled with considerable operating losses during the late 1990s and early 2000 and received multiple downgrades. The health care provider undertook a restructuring four years ago and over the last three has made significant financial strides.
Offsetting some of is strengths, Henry Ford’s liquidity position falls short of other hospital credits in the single-A category and it faces tough competition in the Detroit area. The plans for a new hospital also add construction risks. The system has variable-rate exposure on about 50% of its debt, including its interest rate swaps.
Though approved in 2002, construction of the West Bloomfield Hospital Project in growing and affluent Oakland County had been held up by legal challenges posed by competitors and residents who questioned the need for the hospital in a competitive market.
The 2003 lawsuit challenged legislation that gave the hospital and two others permission to bypass Michigan’s “certificate of need” process on construction projects. Competitors and local residents argued that the 2002 measure was “special legislation” that required a supermajority vote of the Legislature and a vote of area residents.
The lack of a local public vote violated the state constitution, the suit argued. An Ingham County court and the Michigan Court of Appeals ruled that the lawsuit had no legal standing last year and the state Supreme Court on Dec. 6 refused to hear the case.
The new 300-bed hospital, with a price tag of $275 million, is the largest project that will receive financing from the new sale. Space for 185 beds will be constructed first with the rest of the facility being completed in 2008. Other new-money proceeds will finance renovations and an addition to the emergency department at the system’s main campus, construction of a surgical facility at Wyandotte Hospital and Medical Center, and for other equipment purchases and renovations.
