CHICAGO — The Henry Ford Health System enters the market today with $165.7 million of new-money floating rate securities, part of the largest health care provider in Detroit’s ongoing $1 billion, four-year capital campaign to expand and renovate its facilities across southeastern Michigan. The Michigan State Hospital Finance Authority will issue the bonds on the system’s behalf. The system will use proceeds from the sale to reimburse itself for a taxable bridge loan used to purchase Trinity Health’s 50% interest in Mercy Mount Clemens Corp., a 435-bed multi-site system. Henry Ford acquired the system in July.Citi is the underwriter and Dickinson Wright PLLC is bond counsel. The bonds are secured by a pledge of all accounts and revenue of the six-member Henry Ford obligated group, which includes the system’s flagship 903-bed facility in Detroit, six other acute-care facilities, the 560,000-member Health Alliance Plan of Michigan, and other assets. The bonds are expected to carry a letter of credit from JPMorgan Chase & Co. The floating-rate bonds that will be remarketed weekly are tentatively structured to mature serially between 2008 and 2041.The bonds will not be insured, said Brian Gamble, Henry Ford’s corporate director of treasury management services. “We’re a high-rated credit in the health care industry, we have a well-recognized name, and we haven’t felt the need to buy insurance to market our bonds,” he said.Last July’s acquisition of Mercy Mount Clemens — since renamed Henry Ford Macomb Hospitals — is one in a series of ambitious capital plans undertaken by the system as it works to increase its network of hospitals across southeast Michigan. With today’s issue, Henry Ford will carry a total of about $765 million of debt. Prior to 2006, the system had not entered the market for more than 10 years. The $1 billion capital campaign was launched in 2006 with the sale of $598 million of debt and is expected to continue through 2010, though the provider has no immediate plans to issue more debt through next year, Gamble said. The system sold about $300 million of new-money debt in 2006 to finance construction of a new 185-bed hospital located in West Bloomfield that is scheduled to open in February 2009. Other capital plans include a $300 million renovation under way at Detroit’s Henry Ford Hospital, including construction of a $35 million new wing, and a new Center for Health Services at Wyandotte Hospital in Wyandotte, Mich. In May, the system took over sole ownership of the 169-bed Cottage Hospital in the suburb of Grosse Pointe Farms from Maryland-based Bon Secours Health System Inc.

“This network of facilities provides for a strong base of acute care facilities in the highly competitive metropolitan Detroit market,” wrote Moody’s Investors Service analyst Kay Sifferman in a report accompanying the new sale.Henry Ford’s debt carries an underlying A rating from Standard & Poor’s and an underlying A1 from Moody’s. Moody’s rates the new bonds Aaa/VMIG 1 based on the bank LOC, while Standard & Poor’s assigns a AAA/A-1-plus.Henry Ford reported total revenues of $3.25 billion in 2006, a 7.6% increase from 2005. Net income in 2006 was $134.9 million, a 20% increase from 2005 and the fourth consecutive year of income growth. Executives attribute revenue growth to increased admission volumes, which grew by nearly 18% at the flagship Detroit Hospital. In 2006, cash on hand increased to 123 days, and the annual maximum debt service ratio was 5.6 times. The system’s fiscal performance has been more uncertain during the first six months of 2007 as operating cash flow declined 17% to $14.8 million. “The rating continues to be based primarily on the system’s distinguished brand and the diversity of the system’s asset and revenue base,” Standard & Poor’s analyst Brian Williamson said in an initial report on the sale. “The stable outlook reflects our expectation that management will not allow its operations to continue to slip any further.”With the $165 million offering, Henry Ford boosts its debt load by 28%. That follows an increase of 85% in 2006, but the level remains manageable given the system’s revenue stream, according to Gamble. “It is a significant increase, but I would add that our debt load has been extraordinarily low compared to most other health care associations of our size,” he said.Analysts cited construction risks associated with building the West Bloomfield facility along with potential difficulties in hiring staff in the midst of national health care labor shortages. Other challenges include a 67% funded pension plan with a $168 million unfunded liability at the close of fiscal 2006.The system faces a larger overall challenge in its service area — a highly competitive market that is facing declining economic conditions, including a jump in the number of uninsured residents as the automobile and manufacturing industries continue to shed jobs. “It always continues to be a concern for all health care providers in that area, the economy continues to be a concern as people continue to lose their jobs,” Sifferman said.The system in 2006 provided more than $104 million in uncompensated medical care, and the Henry Ford Hospital in Detroit alone was hit with $2.2 million in state cuts due to budget shortfalls in 2006. It’s unclear how further Medicare and Medicaid cuts would affect the system’s fiscal position. “As everyone knows, it’s a very challenging environment and we’re working very diligently to remain profitable in very difficult times,” Gamble said. “We’re managing our business the best we can.”Henry Ford had struggled with considerable operating losses during the late 1990s and early 2000, and received multiple rating downgrades during the period.

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