Michigan hospital system bonds to consolidate administration

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Michigan-based Spectrum Health System plans to use a chunk of the proceeds from $450 million of taxable, new money and refunding bonds it is pricing Tuesday to consolidate its administrative offices into a central location.

Roughly $100 million of new money bond proceeds will fund the construction of the new office called the Center for Transformation and Innovation.

With the move Spectrum will consolidate 26 offices into one new facility.

“By eliminating leases at multiple sites, we expect to realize significant long-term savings,” said Bruce Rossman, a spokesperson for the system. “However, since integral steps such as final property purchase, facility planning, and municipal permitting are not complete, we are hesitant to share a savings figure at this time.”

George Huang, a director and senior municipal research analyst at Wells Fargo, said that other health systems that have been for the most part larger institutions similar to size of Spectrum have looked to consolidate administrative operations in a similar way.

“Once you have the right IT system in place consolidating them into a central location and reducing the number of locations you are operating from makes sense and can create a permanent, ongoing savings.”

Huang said that if, like in the case of Spectrum, the leases terminated are operating leases, it can create a credit upside. By not renewing the leases Spectrum will reduce operating costs.

“Depending on the lease structure, if it was an operating lease the rating agency will factor in the overall size of the operating lease and count that towards leverage because that comes out of cash flow too,” Huang said.

The facility is expected to open in 2022 and will be on property Spectrum Health owns in Grand Rapids southwest of the Cornerstone University campus.

It will house several offices, including for human resources, finance, facilities management, the medical group and other back-office functions, to “achieve efficiencies of scale through optimization of meeting rooms and learning opportunities.”

Spectrum Health plans to issue up to $250 million in new money, taxable debt on Tuesday.

“Spectrum has no other planned large projects on the horizon, but is going through a master facility planning process to determine the next set of capital needs, and any remaining taxable bond proceeds, if issued, will be used for future spending,” S&P said.

It is also pricing $200 million of refunding bonds which will be used to refund bonds it issued in 2011. The system is also planning to refinance a $40 million line of credit with the bond proceeds.

The bonds will be offered over three series with two being offered by Spectrum Health through the Kent Hospital Finance Authority.

J.P. Morgan and Wells Fargo are co-senior managers. Kaufman, Hall & Associates LLC is advising Spectrum Health. Miller, Canfield, Paddock and Stone PLC is bond counsel.

Ahead of the sale, S&P Global Ratings affirmed the system’s AA ratings and Moody’s Investors Service affirmed its Aa3 rating. All assign a stable outlook.

Spectrum Health is an integrated health care delivery system headquartered in Grand Rapids and covers a large part of western Michigan. The system consists of 14 acute care hospitals, a large physician group, over 155 outpatient sites, long-term care, and Priority Health, a 94%-owned managed care organization.

The system had $6.8 billion in total operating revenue as of June 30, 2019.

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Primary bond market Not-for-profit healthcare Refunding bonds Taxable bonds Michigan