CHICAGO - Des Moines-based Iowa Health System - the state's largest health care provider - this week plans to sell $50 million of new-money bonds and early next month will shift $350 million of its variable-rate debt to a fixed-rate structure as the system seeks to reduce its floating-rate exposure.

The Iowa Finance Authority is the issuer. JPMorgan is the senior manager on the $50 million new-money piece. JPMorgan and Citi are underwriters on the reoffering of $201 million of variable-rate 2005 bonds and $150 million of variable-rate 2008 debt. Dorsey & Whitney LLP is bond counsel.

IHS will decide at pricing whether to use a fixed-rate structure on the uninsured $50 million issue or a long-term variable interest rate mode that would lock in initial rates for at least three years before the bonds could be put, according to the finance team.

The 2005 and 2008 variable-rate securities being reoffered as fixed-rate bonds will continue to carry insurance from Assured Guaranty. Assured earlier this month completed its $822.1 million purchase of Financial Security Assurance Holdings Ltd., making it the dominant bond insurer and essentially the only insurer writing significant new business.

Nearly all of the health system's debt portfolio is currently in a floating-rate structure, though it is swapped to a synthetic fixed rate. The reoffering will lower to 40% the level of variable-rate exposure.

"We have been concerned about the downgrades of insurers and problems with variable-rate bonds, so we really wanted to put more of our debt in a fixed-rate," said Iowa Health System finance director Jim Rasmussen.

Proceeds of the new money will finance various capital projects at hospitals in Dubuque, Sioux City, and Waterloo, and construction costs of a new hospital being built in West Des Moines. The debt is replacing cash the system had planned to put towards the construction of the new hospital.

Ahead of the transaction, Fitch Ratings affirmed the health system's AA-minus rating and Moody's Investors Service affirmed its Aa3. The system will have a total of $670 million of debt after the transaction. Fitch rates Assured AA on rating watch evolving and Moody's rates the insurer Aa2 on watch list for a possible downgrade.

IHS - which provides care to one in four state residents in seven markets - operates 12 hospitals and 142 physician clinics in Iowa and Illinois, according to Fitch, which views as favorable the near completion of the system's new hospital in West Des Moines ahead of schedule and below budget. The hospital is expected to open later this year.

The system had $2 billion of total operating revenue in fiscal 2008 and $801 million of financial resources in the form of unrestricted cash and investments as of May 31, providing cash to cover 163 days of operations and a cash-to-debt ratio of 130%.

From fiscal 2002 through fiscal 2007, the system posted year-over-year improvements in its maximum debt service coverage ratios to 5.2 times from 3.6 times, with the exception of fiscal 2008, when coverage dipped to 2.6 times due to investment losses.

Moody's described the system's strong market position and geographic diversity as credit strengths and views the shift away from variable rates as favorable. Its challenges include a heavy reliance on two-thirds of its revenues from three urban markets where it faces competition. IHS' largest markets are Des Moines, Cedar Rapids, and the Quad Cities, representing 67% of total operating revenues.

Another challenge is management of the system's $500 million fiscal 2008-2010 capital program that includes the new 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.

The system has 17 interest-rate swap agreements. About $600 million are fixed payor swaps that synthetically convert variable-rate bonds to a fixed-rate obligation with another $161 million of total swap exposure representing swap transactions that offset one another, according to Fitch.

As of June 30, the swaps had a negative value of $48.2 million. IHS is not required to post collateral due to swap insurance on $351.3 million of its swap agreements provided by Assured Guaranty, Fitch wrote. The system is not terminating any of the swaps associated with the Series 2005 and 2008 bonds being reoffered because of their current negative mark-to-market value, Moody's said.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.