CHICAGO — The well-respected Rochester, Minn.-based Mayo Clinic, beginning on Monday, will reoffer two of three term bonds coming due over the next two months and convert the third to a fixed-rate structure amid negative credit reports that include a downgrade from Standard & Poor’s.

The three pieces of short-term debt being restructured were originally sold last spring as part of more than $500 million of new-money, refunding, and auction-rate restructuring debt. Officials tapped a range of securities including the term bonds, variable-rate demand obligations, and commercial paper to complete the transaction.

On Monday, Mayo will reoffer a $60 million term bond for another 12- to 13-month term with the city of Rochester serving as issuer. Mayo will then restructure a $90 million tranche coming due April 15 through the Wisconsin Health and Educational Facilities Authority. That tranche will be shifted to a fixed rate. A final $70 million term bond coming due May 7 will be reoffered for another 12- to 13-month term through Rochester.

“That’s the plan as long as nothing changes with the market,” said Rick Haeflinger, manager of treasury services. The terms captured a 1.68% rate when originally offered and officials are expecting a rate on the new terms at least 75 basis points lower.

In swapping to a fixed rate on the $90 million piece issued for projects at its Luther Hospital, officials will accomplish their original goal scrapped last spring in favor of the short-term structure because of rising fixed-rate interest rates.

The term bond structure has served the Mayo well, according to Haeflinger said. “We feel the rates are pretty good and it’s a good diversification of modes in our portfolio,” he said.

Bank of America Securities LLC/Merrill Lynch & Co. and Wells Fargo Brokerage Services are underwriters and Shattuck Hammond Partners is financial adviser.

The Mayo Clinic has $1.7 billion of debt.

Moody’s Investors Service affirmed the system’s Aa2 rating but revised its outlook to negative, while Standard & Poor’s downgraded the credit one notch to AA-minus because of the clinic’s weakened balance sheet. The clinic carries Standard & Poor’s top short-term ratings of A-1-plus while Moody’s does not assign short-term marks to Mayo’s liquidity providers, which include its own self-liquidity.

Mayo, which benefits from a top-notch international clinical reputation, has suffered a “significant” $1.7 billion decline in its unrestricted net assets, weakening its balance sheet and reducing debt service coverage to an adequate but modest rate of 3.4 times, Standard & Poor’s wrote. The system faces increased pension contributions because of investment losses and the strain of ongoing capital funding pressures and reduced fundraising success.

“The stable outlook reflects Mayo Clinic’s many credit strengths offset by the recent decline in balance sheet strength and softening in operating results,” wrote analyst Stephen Infranco. “While we have concerns that earnings could remain under pressure in the near term because of the weak economic climate contributing to softer patient volumes and a shift in the payer mix, management has implemented some cost-saving initiatives and contingency plans that we believe will result in improved performance in fiscal 2009.”

“We are disappointed, but we fully understand the downgrade, given the economic downturn and erosion that has occurred to our balance sheet because of investment losses,” Haeflinger said.

The Mayo Clinic operates three campuses in Scottsdale/Phoenix, Ariz., Jacksonville, Fla., and Rochester. 

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