CHICAGO – Janesville, Wis.-based Mercy Alliance Inc. will issue $172 million of new-money and refunding bonds Wednesday in a deal that will shed floating-rate risk in the hospital’s debt portfolio.
Ziegler Capital Markets is the underwriter and the bonds are being sold through the Wisconsin Health and Educational Facilities Authority. Ahead of the sale, Moody’s Investors Service affirmed the system’s A2 rating and stable outlook assigned to $216 million of debt.
About $50 million represents new money that will finance various capital projects, said WHEFA executive director Lawrence Nines. Mercy initially intended to sell only new-money debt, but as interest rates moved in its favor and credit spreads on hospital bonds narrowed, it opted to act on a refunding.
With the refunding piece, the hospital will shift its existing floating-rate bonds to a fixed-rate structure, eliminating market and bank letter of credit risks.
The rating reflects “Mercy’s distinctly leading market position, continued strong absolute liquidity and our expectation that operating results will remain at current levels,” Moody’s wrote. “The rating is tempered by above-average leverage and a heightened competitive profile.”
The hospital enjoys a 73% inpatient and 51% outpatient market share in its region and has a long-standing alliance with physicians that provides a reliable referral base. It saw a 4% operating margin in fiscal 2011 and 3.7% for the first eight months of fiscal 2012 and has more than $240 million in liquidity that covers operations for 192 days. Moody’s considers the elimination of the variable-rate exposure a positive move.
Mercy’s challenges include new competition posed by the opening in January of a hospital operated by SSM Healthcare, increased leverage following the issue this week and the ongoing need for capital investment that will limit material improvements in its balance sheet.
Separately, Wisconsin Gov. Scott Walker recently signed legislation giving WHEFA the ability to issue debt out 50 years. The authority had sought approval to expand its conduit abilities to cover all not-for-profits, but that measure was stripped from the bill.
The change could have cut into the future local business for the national conduit known as the Public Finance Authority, which Wisconsin lawmakers established several years ago to the dismay of many state conduit agencies worried that the new agency would undermine their say on building projects.
