CHICAGO - Indiana's Parkview Health System will enter the market over the next few weeks with $480 million of fixed- and variable-rate debt that will be used to refinance outstanding auction-rate debt and bank-held variable-rate bonds and to raise new money.

The $480 million sale includes $150 million of new money and the refinancing of two pieces of outstanding debt, both insured by Ambac Assurance Co. The six-hospital system will use proceeds from $150 million of new money to finance the building of a new $536 million facility that is the biggest construction project in northern Indiana, said Parkview's chief financial officer, Jeffrey Francis.

The system will shed the downgraded insurer's coverage and shift one piece of the debt to a fixed-rate mode while leaving the remainder in a variable-rate mode supported by letters of credit. As part of the refinancing, the system will terminate a fixed-to-floating rate swap on its auction-rate debt and pay a $17 million termination fee to the counterparty, Merrill Lynch & Co.

With the Indiana Finance Authority acting as conduit issuer, Parkview will begin a one-day retail order period Monday followed by an institutional sale Tuesday on the $270 million fixed-rate debt piece. The system plans to sell the remaining $225 million of variable-rate bonds on Aug. 26.

Merrill Lynch is the underwriter. Ponder & Co. is financial adviser. Ice Miller LLP is bond counsel.

Standard & Poor's affirmed its A-plus rating with stable outlook on the system's debt in advance of the deal. Moody's Investors Service rates the system's debt A1 with a stable outlook.

The transactions will significantly increase the amount of fixed-rate debt in Parkview's overall outstanding debt portfolio - to 53% from 14%, according to Mike Tym of Ponder.

"The major reason [to refinance the debt] is to reduce the overall credit profile risk as they go into a fairly substantial construction project," Tym said. "We're eliminating several capital market risks that are typically associated with third-party credit enhancement."

After the transactions, the system will have $600 million of outstanding debt, of which $250 million will be in the variable-rate mode. About $220 million of the variable-rate debt is hedged with a series of existing floating- to fixed-rate swaps with Citi.

"It's a nice balance between fixed-rate and then taking advantage of the shorter end of the curve for lower effective interest rates," Francis of the upcoming transactions.

In addition to increasing the share of fixed-rate debt in its debt portfolio, the refinancing will allow Parkview to shed the troubled insurer, which has been hit by a series of downgrades, most recently when Standard & Poor's downgraded it to CC from BBB on July 28, followed less than a week later by Moody's downgrade to Caa2 from Ba3.

After the system's roughly $170 million of auction-rate debt failed to be remarketed in February 2008, amid the collapse of the auction-rate debt market, officials planned to enter the market to refinance it within several months.

But the timing of that transaction - set for the third week of September 2008 - proved ill-fated as the market again collapsed following Lehman Brothers' bankruptcy filing. Officials pulled the deal and earlier this year and hired Ponder & Co. to act as financial adviser as they headed back to market, Francis said.

The $225 million of variable-rate debt is supported by a trio of letters of credit from National City Corp., Wells Fargo Bank NA, and Citi.

While LOC fees continue to be higher than last year, the system had no difficulty securing the credit, according to Tym.

"Parkview had some very good interest from several banks, and they're not using all the capacity that's available," he said. "Fees are higher than they were a year or two ago but the covenants are reasonable."

The system plans to move its 330-bed hospital from downtown Fort Wayne to a location near Interstate 69 and have it open by 2012, Francis said. Officials will use cash from its investment portfolio to finance the remainder of the project, he said.

Standard & Poor's cited the system's location in an "increasingly competitive market" and relocation of its main facility as credit strengths.

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