CHICAGO — Indiana University Health Inc., the state’s largest health care system, on Monday will price $228.2 million of variable-rate bonds in the first of three borrowings that will total nearly $800 million.
The package includes $181.3 million of new-money bonds and a $640.6 million of refunding.
Proceeds from the new-money bonds will reimburse IU Health for $150 million spent for the construction of a new 40-bed hospital set to open this fall and will repay a $30 million line of credit.
The refunding bonds will move all of the system’s outstanding variable-rate debt — all of which is supported by liquidity facilities expiring this year — under one trust indenture.
It is IU Health’s first new-money sale since 2006 and the first since it undertook a system-wide expansion and made several acquisitions.
A name change emphasizes its partnership with the Indiana University School of Medicine. It was formerly known as Clarian Health Partners Inc.
Issuing variable-rate debt will allow IU to maintain an extensive interest-rate swap program, which hedges all of its variable-rate debt. Roughly 40% of the system’s $1.7 billion of outstanding debt is in a variable-rate mode and hedged with swaps.
Headquartered in Indianapolis, IU Health is a 16-hospital system that enjoys a nearly 40% market share in the region. It last entered the market in May 2008 when it refinanced $700 million of insured auction-rate securities. It’s last new-money sale was in 2006.
The system won upgrades last year from both Moody’s Investors Service and Fitch Ratings, which now maintain underlying ratings of Aa1 and AA-minus, respectively.
Last week, Standard & Poor’s boosted its outlook to positive from stable and affirmed its A-plus rating.
Variable-rate debt makes sense for a strong health care credit in the current market, according to Jennifer Alvey, IU Health’s director of cash and debt management.
Alvey joined the system several months ago after serving five years as Indiana’s public finance director. She followed former state budget director Ryan Kitchell, who left state government to become Clarian’s treasurer.
“If you can manage your variable-rate debt in a way that you can protect it and don’t have it all coming due at the same time and have good high-quality banks [supporting it], it’s a good way to go, especially based on where the rates are now in the market,” Alvey said.
The letters of credit supporting the refunding debt will feature staggered expiration dates, she added.
IU Health expects to privately place a chunk of the second and third sales with bids already being solicited.
Alvey said there are several benefits to selling bonds directly to a bank.
“There are more health care entities that are doing [private placements], and we received good bids,” she said. “There are also a lot of advisers and bankers pitching it as a good way to diversify.”
Monday’s bond sale is divided into five series of term bonds, four of which mature in 2033 with a fifth series maturing in 2036.
Proceeds include $70 million of new money with the remainder refunding outstanding debt issued in 2008.
Bank of America Merrill Lynch is the underwriter for the Series B and E bonds. Citi is the underwriter for Series A and C, and US Bancorp is underwriting Series D.
Ice Miller LLP is bond counsel. The Indiana Finance Authority is acting as conduit issuer.
Series A, C, and D, totaling $110.8 million, will be supported by a letter of credit from Northern Trust Co. The letter expires on Oct. 19, 2016. Bank of America NA will offer an LOC supporting Series B and E, totaling $117.3 million that expires on April 19, 2015.
“We’ve just had a great response to our credit,” Alvey said of seeking out bank support, noting that the system will pay less for the new LOCs than on the expiring support. “Also the documentation is very flexible in terms of what we have the ability to do in the future.”
The second series of bonds is expected to total $441 million, of which about $210 million will be privately placed with two different banks. That deal is expected in early May.
The final series will total $111.3 million, all of which will likely be privately placed.
IU Health has $1.69 billion of outstanding debt. Its bond portfolio features an underlying mix of 60% fixed-rate debt and 40% variable rate.
Analysts say one of the system’s challenges is a swap program that currently has a negative market valuation of just under $200 million.
As of last year, the health system maintained $2 billion of swap agreements. Of that, $520 million is floating-to-fixed-rate swaps and $1.4 billion is basis swaps.
Alvey said management has no intention to terminate swaps as part of the transactions, but would consider doing so in the future depending on market conditions.