CHICAGO — The Urbana, Ill.-based health care provider Carle Foundation is set to enter the market later this month with $230 million of new-money debt, and will privately place another $100 million of bonds with two banks in a structure that lowers borrowing costs and limits liquidity risks.
Barclays Capital and Goldman, Sachs & Co. are underwriters on the 30-year fixed-rate bonds, which will sell the week of April 18. JPMorgan Chase & Co. and PNC Capital are directly purchasing the other $100 million. Both deals are being sold through the Illinois Finance Authority.
Ponder & Co. is advising Carle and Jones Day is bond counsel.
Ahead of the sale, Fitch Ratings affirmed Carle’s AA-minus and assigned a stable outlook. Standard & Poor’s currently rates the system AA-minus with a negative outlook but had not released an updated report by Monday, said Scott Hendrie, Carle’s director of treasury.
The new issue will bring Carle’s debt load to $702 million with 55% in fixed-rate mode and 45% in floating-rate mode.
The direct purchase, multi-modal bonds feature a seven-year put but Carle has the flexibility to shift to several different structures depending on market conditions after the seven years. The provider expects to amortize the bonds over 30 years.
“It was the best capital structure in terms of costs and flexibility,” Hendrie said.
Carle officials considered several structures, but going solely with a fixed-rate structure would have cost more than they hoped to pay, given the system’s solid ratings. At the same time, officials also were hesitant to take on more liquidity risks. The system has $160 million of variable-rate bonds backed by letters of credit from a 2009 sale.
“Banks have cash on hand and an appetite to buy some debt, so it benefits both of us,” he said of the bank purchase.
Direct bank placements have been growing in popularity due to turmoil in the municipal market and demand for higher yields, especially among lower-rated credits in the health care sector.
Carle will use proceeds to refinance notes related to mortgages on two of its facilities, construct two new physician clinics, and construct and equip a new nine-story heart and vascular institute.
Construction is expected to begin in July and continue through mid-2013. The foundation received a certificate of need for the projects from Illinois regulators in 2008.
Carle operates a 325-bed hospital in Urbana, a certified home health agency, a hospice, and a range of other medical-related facilities through affiliates throughout the central Illinois region. Last April, the foundation acquired the Carle Clinic Association, which includes Health Alliance Medical Plans and various group medical practices. With the new issue, the members of the obligated group will be expanded to include the acquired companies.
In affirming its rating, Fitch said Carle’s acquisition of the clinic and HAMP “will significantly enhance Carle’s already growing footprint in the greater Urbana/Champaign region, providing what Fitch believes will be a stable operating platform at the current rating level over the longer term.” Carle also benefits from a nearly 48% market share that grew a total of 13% between 2002 and 2010, according to Fitch. The system generated $1.6 billion of revenue in 2010.
Carle is challenged by light liquidity levels for its rating category, and its maximum annual debt service coverage ratios will remain stressed through 2015 as it pays down $160 million of outstanding promissory notes. Construction of the new tower also poses credit risks, as does near-term operating volatility as Carle integrates the clinic and HAMP.
The stable outlook reflects Fitch’s belief that the hospital’s strong historical operating performance, combined with HAMP’s consistent operating performance, outweigh concerns about operating volatility. “This stability is further supported by Carle’s solid market share position,” the agency wrote.