CHICAGO — Henry Ford Health Systems is expected to enter the market this week with $322 million of new-money and refunding revenue bonds as part of the system’s scaled-back capital campaign to expand its services across southeast Michigan.

As one of the largest providers in the region and the primary care provider in metro Detroit, HFHS faces challenges related to what is one of the weakest economies in the nation. The area’s high unemployment rate has lead to a rising number of self-pay and Medicaid patients. But with the opening of a new hospital and a number of cost-cutting measures, the system’s operating losses have shrunk over the year.

The $322 million bond sale will refund $192 million in variable-rate debt issued in 2006 and it includes about $100 million of new money. Proceeds from the new-money portion will go to reimburse the HFHS for capital spent on construction of a new 300-bed hospital located in West Bloomfield as well as renovations at the system’s main campus in Detroit.

The new facility in West Bloomfield hospital makes Henry Ford the only system with facilities in all three metropolitan Detroit counties: Wayne, Oakland, and Macomb.

Citi is the underwriter and Dickinson Wright PLLC is bond counsel. The Michigan State Hospital Finance Authority will sell the bonds on the health care system’s behalf.

The bonds are secured by a pledge of revenue of the seven-member obligated group, which includes the system’s flagship 903-bed facility in Detroit, six other acute-care facilities, and the 560,000-member Health Alliance Plan of Michigan, one of the largest health maintenance organizations in the country.

Standard & Poor’s rates the debt A and Moody’s Investors Service rates it A1, while noting that many of HFHS’s margins are low for its rating category.

After the transaction, it will have roughly $873 million in outstanding debt, of which 19% will be in a variable-rate mode. The system last entered the market in 2007 with $166 million in new-money debt.

This week’s new money sale is likely to be the system’s last borrowing in the near term. Officials have scaled back a $1 billion, four-year capital campaign in order to preserve liquidity during the recession. While ongoing projects will be completed, all new projects will be postponed.

The system’s low debt level and solid market position are key strengths, according to credit analysts. HFHS enjoys a strong market position in a highly competitive market that includes Ascension Health, Trinity Health, and the Detroit Medical Center.

“HFHS’ new hospital in West Bloomfield has recently opened, with apparently very successful results, and should be a strong contributor to the organization over the short term,” Standard & Poor’s analyst Kevin Holloran said in a release on the upcoming sale. “A deterioration of operations or balance sheet strength would hurt the rating, while improvements to the balance sheet will be necessary for any positive effect on the rating.”

Through the first eight months of 2009 the system reported an operating loss of $4.7 million, an improvement from earlier in the year, when operating losses totaled $10.9 million through June 30 and $12.9 million at the end of the first quarter.

In addition to the weak economy, challenges include a pension plan that is only 62% funded, with an unfunded liability of $206 million. In an effort to boost funding to 100%, management has made contributions in excess of expenses for the past three years. But large losses caused by market turmoil in 2008 mean that the system’s pension contributions will likely remain high over the near term and could pressure liquidity, Moody’s analysts said.

Like many health care providers in Detroit, Henry Ford is anticipating a decline in insurance revenues as automakers continue to lay off workers and cut back on employee benefits. Nearly 25% of Henry Ford’s “premium revenues” came from the Big Three, Moody’s said.

“Management’s success in adapting to the changing environment quickly will be vital to maintaining its current rating and outlook,” said analyst Kay Sifferman.

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