CHICAGO – Rochester, Minn.-based Mayo Clinic returns to the market Wednesday to take advantage of low interest rates to shed some of its floating-rate exposure.

The clinic will sell through the city of Rochester $220 million of tax-exempt, fixed-rate bonds to refund outstanding commercial paper from a 2000 issue, according to assistant treasurer Rick Haeflinger.

"Mayo is converting the bonds to a fixed rate to extend the maturity of the bonds, reduce the variable-rate exposure, and lock in low fixed rates," Haeflinger said in an investor presentation.

After the deal, about 70% of the clinic's $3 billion debt portfolio will be structured in a fixed rate and 30% at a floating rate with no change in its maximum annual debt service demands of $217 million.

Wells Fargo Securities and Bank of America Merrill Lynch are underwriting the deal. Raymond James is advising Mayo.

Ahead of the sale, Moody's Investors Service and S&P Global Ratings affirmed the clinic.

Moody's rates Mayo's debt Aa2 with a stable outlook.

It reflects "Mayo's large size, demonstrated national and international draw for patients leading to geographic diversity of revenue and strong fundraising ability," Moody's said. "Challenges include support of research and education activities that suppress adjusted margins and somewhat modes pro forma debt coverage metrics."

The bonds are an unsecured obligation of Mayo Clinic as obligor and guarantor.

S&P rates the clinic AA with a stable outlook. "The long-term rating on the Mayo Clinic reflects an excellent enterprise profile as one of the country's leading health systems," said S&P analyst Martin Arrick.

Mayo Clinic benefits from a diverse group of operating assets. It operates its flagship facility--two large tertiary hospital facilities in Rochester that together are known as Mayo Clinic Hospital-Rochester. Mayo also operates campuses in Phoenix and Jacksonville, Florida.

Mayo's rating also benefits from its global reputation and its ability to attract patients internationally.

"We believe that rating stability over time depends, in part, on the Mayo Clinic continuing to steadily improve its balance sheet to generate a greater cushion for periods of volatility, such as heightened uncertainty in the health care industry or when investment market returns are down," S&P added.

The system generated $10.3 billion of revenue last year, up 5.7% from 2014, and is tracking at $5.4 billion so far this year, up 7.6% from the same period last year, according to the presentation. Expense growth outpaced revenue growth last year due to higher supplies and services and benefit costs.

The system expects to spend $700 million on capital this year, up from $516 million in 2014 and $628 million last year.

"We have built up the capacity to pursue this level of spending through cash flow from operations, debt capacity, and fundraising" and can move quickly to cut capital spending to "to preserve cash" if needed, said chief financial officer Kedrick Adkins.

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.