The Massachusetts Health and Educational Facilities Finance Authority will head to market in the next two weeks with $200 million of tax-exempt, new-money debt on behalf of Partners HealthCare System.
The nonprofit health care provider has been borrowing on a biannual basis, but this year's offering is smaller than Partners' typical $400 million-size bond deal and reflects the hospital system's revised capital plan.
JPMorgan and Merrill Lynch & Co. tomorrow will kick off a one-day retail order period for $100 million of fixed-rate Series 2009 I-3 bonds. Institutional pricing will begin Wednesday.
Edwards, Angell, Palmer, and Dodge LLP is bond counsel for the authority and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC is bond counsel for Partners. RBC Capital Markets Corp. is the financial adviser.
The bonds will offer serial maturities from 2013 through 2022 and one term bond. The preliminary official statement does not indicate the maturity date for the term bond.
Fitch Ratings and Standard & Poor's rate the fixed-rate bonds AA. Moody's Investors Service assigns its Aa2 rating to the transaction.
MassHEFA on May 13 will issue another $100 million of variable-rate bonds split evenly between two series with maturities out to 2044, according to the POS. Series 2009 I-1 bonds will carry Partners' self-liquidity. U.S. Bank National Association will provide a standby purchase agreement on the Series 2009 I-2 bonds.
The Series 2009 I-1 bonds backed by Partners' self-liquidity carry AA/A-1plus and F1-plus ratings from Standard & Poor's and Fitch, respectively. Moody's rates the bonds Aa2/VMIG-1.
Fitch and Standard & Poor's rate the Series 2009 I-2 bonds F1-plus and A-1-plus, respectively. Moody's will assign a rating closer to the pricing date.
Being a double-A credit may help Partners at market as many investors are cautious of hospital paper, according to Matt Fabian, managing director at Municipal Market Advisors.
"It's more difficult for any hospital to get access to the debt market than it was [before]," Fabian said. "But Partners with a double-A does signify they should be able to attract some fairly good demand because the double-A rating will overcome investor trepidation."
As of April 30, yields on double-A rated tax-exempt health care bonds in Massachusetts ranged from 0.87% in 2010 to 5.39% in 2039, with yields 44 basis points over that day's Municipal Market Data triple-A yield curve in 2010, according to Thomson Municipal Market Monitor. The widest yields are on debt maturing in 2014 and 2017, with yields 109 basis points over the MMD curve.
Partners plans to swap both floating-rate series to a synthetic fixed rate. It will pay a fixed rate of 3.71% to a counterparty and receive 67% of the one-month London Interbank Offered Rate. Debra Sloan, Partners' assistant deputy treasurer, declined to identify the counterparty involved in the swap agreement.
Partners has $2.1 billion of outstanding debt. Of that amount, $893.7 million is fixed-rate debt, $539.6 million is swapped to fixed rate, and another $670 million remains unhedged variable-rate debt. The total swap portfolio stands at $1.1 billion, including $500 million of forward-starting derivatives, and it had a negative mark-to-market value of $278.5 million as of March 31, according to the POS.
While Partners does not have a mandatory ratio of fixed- to variable-rate debt, Sloan said it prefers to keep its variable rate debt below 40% of its total outstanding debt. Because Partners is a relatively active issuer it uses derivatives to hedge interest rate exposure.
"We're a frequent borrower and we think that we would bear more risk to not hedge a portion of our exposure to interest rate risk," Sloan said. "So by locking in, by securing our forward swaps, we have hedged a portion of our future interest rate risk because we know that we're going to be in the market from time to time. Other issuers may only be in the market every five to 10 years and may have a very different philosophy but for us, being a frequent borrower - and we've looked at plenty of data to support this - one can make an argument that it is actually more risky not to hedge."
According to Fitch, Partners' cash flexibility and operating revenue help offset the potential risks connected to the institution's large derivative portfolio. The system has 180 days cash on hand as of Dec. 31. In addition, Partners serves eastern Massachusetts and the greater Boston area, accounting for more than 20% of the area's market share since 2003.
"Fitch believes Partners' strong liquidity position negates the risks associated with potential termination payments," according to a report on the credit. "Fitch also believes Partners' management team has shown its ability to manage the swap transactions and views the swap exposure as a minimal credit risk. In addition, Partners uses six different counterparties, which Fitch views favorably."
This year's bond offering is smaller than previous biannual borrowings. In 2007, MassHEFA sold $620 million of fixed-rate and variable-rate new money bonds on behalf of Partners. In light of the current economic recession, losses in the system's investment fund, and losses in the fair value of its derivatives, the health care provider has scaled back on its capital plan, deferring approximately $840 million in estimated capital spending through 2011, according to the POS.
Partners HealthCare was founded in 1994 by Brigham and Women's Hospital and Massachusetts General Hospital. The system includes primary care and specialty physicians, community hospitals, specialty facilities, community health centers, and other health-related entities. It is the largest non-university-based nonprofit private medical research entity in the U.S.
Partners ended fiscal 2008 on Sept. 30 with an operating profit and also posted operating profits for the last three months of 2008. From October through December, the system reported a $102.7 million loss in investment income and a $257.5 million loss in change in fair value of hedging and non-hedging swaps. Health care officials posted $135.3 million of collateral to counterparties over the past few months due to fair-value losses on derivatives, according to the POS.
"I think subject to financial performance, it is possible that we could be back in the market next year, but I would emphasize [that it's] subject to financial performance," Sloan said. "Basically, we've separated from our historical, every-two-years coming to market and we basically have one year's worth of financing right now, and we'll reevaluate things in 2010."
Bond proceeds from the Series 2009 I bonds will help support a new 500,000-square-foot building at MassGeneral's Boston campus. The new facility will house an expanded radiation and oncology department and emergency services. The bond sale will also help finance two new emergency care facilities in Danvers and Foxborough, and various other upgrades and infrastructure improvements throughout the system.
