CHICAGO — The Mayo Clinic will return to the taxable market for the second time in six months as low rates coupled with freedom from tax-exempt compliance issues are proving too good of an incentive to resist.
The Rochester, Minn.-based system will sell $300 million of taxable securities due in 2047 as soon as Tuesday, said the clinic’s manager of treasury services, Rick Haeflinger. Bank of America Merrill Lynch is the bookrunner and Wells Fargo Securities is co-senior manager. Raymond James is the financial adviser.
Standard & Poor’s revised its outlook to negative from stable on Mayo’s AA rating ahead of the sale in part due to the system’s growing debt load that will reach about $2.8 billion after the sale. Moody’s Investors Service affirmed the clinic’s Aa2 and stable outlook.
At the time of its taxable sale last summer, the Minnesota health system had not intended to return so quickly to the market, but “as the new year rolled around we saw rates were still low and looked at our balance sheet and we felt we certainly had the capacity to add some debt and so we decided to take advantage of the market rates,” Haeflinger said.
The clinic’s sale last summer captured a yield of 3.774%, about 100 basis points over the 30-year Treasury. The Municipal Market Data top rated tax-exempt yield closed at 2.94 % Friday and the 30-year Treasury closed at 3.16%. With spreads still so narrow, the taxable market retains its appeal and the clinic can issue more quickly without having to undertake the conduit process, according to Haeflinger. It’s also freed from tax rules.
Bond proceeds will finance general corporate purposes including operations and projects that have shorter life spans. After the sale, it does not intend to return to the market until next year when it may issue an estimated $200 million to $300 million in tax-exempt bonds.
New-money issuance supports the clinic’s long-term $3.5 billion capital program. Projects include the expansion of the emergency department at Saint Mary’s Hospital in Rochester. The clinic is building two proton therapy centers that use protons generated through an acceleration process to target cancer cells, one at its main Rochester campus and another at its Arizona facility. The system also has a Florida campus.
Mayo operates 22 hospitals in Minnesota, Iowa, Wisconsin, Florida, Georgia and Arizona. Other projects include three new centers: the Center for Regenerative Medicine, the Center for Individualized Medicine and the Center for the Science of Health Care Delivery.
Mayo’s additional debt issuance and the strain of dealing with two consecutive years of sharply lower pension discount rates prompted Standard & Poor’s outlook change. The lower discount rate “in turn, drove large pension contributions limiting growth in unrestricted cash and investment and lowering unrestricted net assets while raising pro forma leverage to levels we consider high for the rating,” said analyst Martin Arrick.
The rating reflects the Mayo Clinic’s continued sound debt-service coverage, growth in unrestricted reserves, solid revenue growth, an excellent enterprise profile highlighted by its international reputation, integrated physician-led culture, and strength in medical education and research.
Moody’s said the credit benefits from the system’s international clinical reputation as a top health care provider, good financial performance in 2012 even though it was down from 2011 levels, and strong unrestricted investments of $3.3 billion.
Moody’s also noted the strain of the additional debt and pension payments, saying “positive factors are offset by significant growth in debt balances in recent years, and growth in the unfunded pension liability driven by the reduction in the discount rate.”
Mayo last month launched a sweeping, long-term initiative to broaden its appeal with patients and potential staff by dramatically transforming its home city. The plan — dubbed the Destination Medical Center — banks on $2.1 billion of private investment and $585 million of mostly bond-financed state and local support.
The plan envisions improved lodging, hospitality, entertainment, retail venues, and housing stock for both patients and their families. The public funding would help draw public investment by covering the costs of parking, transportation, bridge, skyway and streetscape projects.
The plan relies on up to $500 million of appropriation-backed Minnesota bonds on an as-needed basis to support projects and $85 million raised through a mix of city tax revenues, tax-increment financing and local revenue-backed borrowing. Projects would be approved only if the anticipated new tax revenues were available to repay the borrowing.
“It’s a long-range plan,” Haeflinger said. “Mayo Clinic is investing a lot of capital here and we are asking for a little bit of the tax money to come back and help in the development of infrastructure for Rochester. None of the funds would be used by the clinic.”
Legislation was filed earlier this month. Gov. Mark Dayton supports the plan but it faces hurdles from critics who worry over the level of subsidies. Officials estimate the plan could create more than 25,000 jobs and generate more than $2.8 billion in new local and state tax revenue.