CHICAGO — Kalamazoo, Mich.-based Bronson Methodist Hospital next Tuesday is expected to enter the muni market with $200 million of mostly refunding bonds that will shift nearly all of its debt into a fixed-rate mode.
Part of the proceeds will also be used to pay the costs of terminating interest-rate swaps that have a total negative valuation of around $36 million. The system expects to pay up to $17 million to terminate two of the swaps and part of a third, said John Hanley, managing director at Ziegler Capital Markets, the hospital’s long-time underwriter.
“We are reducing the risk to Bronson’s balance sheet by taking away the variable-rate debt as well as the liquidity costs,” Hanley said. “Given the increased cost of letters of credit and the volatility in their debt structure, Bronson believes traditional fixed-rate debt makes the most sense. There was a lot of risk that hospitals did take in the issuance of their debt, and as we see in today’s marketplace, they’re trying to mitigate that risk.”
The Kalamazoo Hospital Finance Authority is the conduit issuer on the sale. Miller, Canfield, Paddock and Stone PLC is bond counsel.
The refunding comes two years after the double-A rated hospital first planned to enter the debt market, but pushed back its timing as the markets froze. Hanley said Bronson backed away from the 2008 debt restructuring plan because it was difficult to secure capital and interest rates were approaching 8% or higher.
“Bronson believed, and we believed, that was an extraordinary price to pay to convert to fixed-rate debt,” Hanley said. “So we waited for a more advantageous time for Bronson to enter the marketplace to reduce its balance-sheet risk, and we have that in today’s marketplace, where rates are relatively low.”
Moody’s Investors Service revised its outlook to positive from stable ahead of the sale, noting the hospital’s improved operating performance and liquidity position in 2009. The bonds are rated A2. For the first time, the system will attach additional security to the debt by pledging a mortgage on its main hospital as security to bondholders.
The $200 million of bonds are divided into two series. The first series, for $124.5 million, will refund $18 million of 1998 fixed-rate bonds and $70 million of 2009 variable-rate bonds; raise $14 million of new money, and cover the swap termination and issuance costs.
Proceeds from the new-money portion of the sale will be used to finance capital projects at the downtown Kalamazoo facility.
The second series, for $75 million, will refund 2006 variable-rate bonds. The hospital opted to maintain the insurance policy on the original 2006 bonds, which were originally insured by Financial Security Assurance, since acquired by Assured Guaranty.
The system will have around $282 million of outstanding debt after next week’s sale.
Like many hospitals, Bronson had a difficult time negotiating the turbulent bond market of 2008, beginning with the collapse of the auction-rate securities market and ending with the market freeze.
At the time, the system was forced to ask its parent company, Bronson Healthcare Group, to purchase $40 million of outstanding ARS debt and take out a bridge loan to buy the remaining $20 million.
The obligated group includes Bronson Methodist Hospital, a 405-bed facility located in downtown Kalamazoo, as well as two smaller hospitals with fewer than 40 beds each, a physician practice, and a nursing home facility.
The system’s main credits strengths are its size, its leading — and growing — market share in the region, strong operating performance, and its manageable capital plans, according to Moody’s. Shifting nearly all Bronson’s debt into a fixed-rate mode and removing costs associated with letters of credit and interest-rate swaps will strengthen the system, analysts said.