CHICAGO - As Evansville, Ind.-based Deaconess Health System prepares to issue roughly $100 million in fixed- and variable-rate bonds, finance officials say they are hoping to take advantage of the growing appetite for tax-exempt health care debt among retail buyers.
Deaconess plans to sell $55.2 million in fixed-rate bonds and $40 million in variable-rate bonds with the floating-rate piece being backed by a letter of credit from Bank of America. It will be the provider's first bond sale since 2004.
Banc of America Securities LLC is the senior manager on the deal. The Indiana Finance Authority will act as conduit issuer.
Ahead of the deal, Standard & Poor's placed the system's A-plus long-term rating on negative CreditWatch, in part because of the plan to take on additional debt. Fitch Ratings affirmed its A-plus rating.
The fixed-rate bonds are expected to sell the week of March 9 and the variable-rate debt the week of March 23. While finance officials had planned to enter the market earlier, they decided to push back the sale a few weeks to take advantage of growing retail interest in health care paper, said Steven Benov, Deaconess' financial adviser and a managing director at Chicago-based Raymond James & Co.
"Retail has been a heavy buyer of hospital paper since last November," Benov said. "There have been several prominent health care deals that went heavily retail, and several health care transactions in recent weeks that have attracted significant retail interest."
Retail investors have been attracted by the relatively high yields - between 7.5% and 8.5% - of some health care bonds, while at the same time institutional interest plummeted last year amid the credit crunch that froze the market, Benov said. He estimated that 25% to 50% of some recent large health care deals have been purchased by retail investors compared to an average of less than 5% two years ago.
"Then, institutions had an insatiable appetite for good health-care rated paper that wasn't leaving much room for retail," Benov said.
In particular, Deaconess hopes to spark interest among local Evansville and Indiana buyers, said Cheryl Wathen, the system's controller.
"We traditionally have not had any difficulty in selling our bonds, and we feel like locally there are going to be people that want to buy our bonds," she said. "We want to have plenty of time to have calls with potential bond buyers."
The bond interest carries an exemption from Indiana state income taxes in addition to the federal exemption.
Deaconess has three campuses in Evansville as well as joint ventures with several other facilities, Wathen said. The provider enjoys a 63% market share in primary services in the area - an increase from a 46% share in 2002, according to Fitch.
The system has a history of "robust profitability, strong volume trends, and increasing market share," Fitch analyst Alex Bumazhny said in a release on the upcoming bond sale. Like most health care providers, Deaconess has suffered from weakened liquidity over the last year in part due to investment losses, as well as costs stemming from the acquisition of a clinic.
Standard & Poor's warned that the system's decision to take on $100 million in additional debt could significantly weaken its balance sheet. The rating agency said it would resolve the negative CreditWatch status within the next few weeks as it reviews more information from Deaconess.
The system currently has roughly $149 million in outstanding debt, 49% of which is variable rate, Wathen said. Proceeds from the upcoming bond sale will be used to finance an expansion at one of its Evansville facilities.
