CHICAGO - Des Moines-based Iowa Health System enters the market today with nearly $250 million of variable-rate debt in five series with three letter of credit providers to raise $43 million for new projects and to refund $201 million of outstanding floating-rate debt insured by Ambac Assurance Corp.

The bonds are divided into five series - two of $55.3 million, one of $32 million, one of $59 million, and one of $43 million.

JPMorgan, Banc of America Securities LLC, and Wells Fargo Brokerage Service LLC are serving as underwriters and remarketing agents, and each parent bank will provide direct-pay LOCs for their tranches of debt.

The Iowa Finance Authority is issuing the bonds on behalf of the system. The LOCs with JPMorgan Chase Bank, Wells Fargo, and Bank of America include a provision under which the system must pay any un-met tenders in the event the credit enhancers fail to pay. The terms allow about 15 days for the IHS to ready the funds to meet the un-remarketed tenders.

"Although the likelihood of JPMorgan Chase, Wells Fargo, and Bank of America not meeting the puts is remote, Fitch views this as a potential credit event that could place pressure on IHS' liquidity position," Fitch Ratings analysts wrote in their report on the transaction.

Fitch affirmed IHS' AA-minus underlying credit and Moody's Investors Service affirmed its Aa3. Moody's assigned top short-term ratings to the bonds to reflect the joint support of the LOCs and IHS, while Fitch's short-term ratings are based on the banks' ratings.

The IHS is the largest health care provider in the state, operating nine hospitals in Iowa and two in Illinois, with total revenue of nearly $2 billion last year.

Fitch said the system's strong rating is due to its geographic diversity, solid liquidity with $753 million in unrestricted cash, and sound debt service coverage ratios of 13.9 times. Analysts say another positive is the upcoming opening of a new hospital in West Des Moines this year, which is ahead of budget and schedule.

Moody's said the system's challenges include concerns that 67% of revenue comes from three urban markets where Iowa Health faces strong competition from other providers. The system also has ambitious capital plans that call for $500 million to be spent for expansion and renovation projects through 2010 and $2 billion over 10 years.

Current projects include the new West Des Moines hospital, renovation of the emergency department and cardiology unit at one facility, and construction of a replacement facility for the Jones Regional Medical Center critical access hospital.

Moody's also noted that the $753 million in cash marks a 21% decline from levels a year earlier due to market losses. The system has also experienced flat inpatient admission levels for the past three fiscal years.

All of the system's $625 million of debt is in floating-rate structures but synthetically fixed through six swap agreements.

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