CHICAGO — Novi, Mich.-based Trinity Health Credit Group will enter the market today with $233 million of fixed-rate revenue bonds, followed by $102 million of variable-rate securities in two weeks to finance hospital projects in Indiana and Michigan.
The transactions represent part of Trinity’s $3.6 billion, five-year capital campaign, which relies on roughly $1.3 billion of debt. The system expects to issue about $250 million annually, continuing its tradition of borrowing roughly $200 million nearly every year since its founding in 2000.
The fourth-largest Catholic health care system in the U.S., Trinity operates 44 acute-care hospitals, 379 outpatient facilities, and 33 long-term care facilities across eight states that generate about $6.7 billion in annual operating revenue.
With the Indiana Finance Authority acting as conduit issuer, Trinity will enter the market today with $232.1 million of fixed-rate revenue bonds. On Nov. 12, it plans to price $102 million of variable-rate revenue bonds with the Michigan State Hospital Finance Authority acting as conduit issuer.
Goldman, Sachs & Co. and Merrill Lynch & Co. are the underwriters on the transactions. Hawkins Delafield & Wood LLP is bond counsel. Kaufman Hall & Associates Inc. is financial adviser. Ahead of the sale, all three rating agencies affirmed their mid-double-A ratings on the system. Moody’s Investors Service rates the credit Aa2, while Fitch Ratings and Standard & Poor’s rate it an equivalent AA.
The finance team crafted the mix of fixed- and variable-rate debt on the upcoming deals largely based on the system’s policy of maintaining roughly 55% fixed-rate debt and 45% variable-rate debt in its overall debt portfolio, said Jim Bosscher, Trinity’s senior vice president and chief investment officer.
Taking into account the system’s interest-rate swaps, which hedge nearly $1.4 billion of outstanding debt, 75% of the portfolio is in a fixed-rate mode and 25% is in a variable-rate mode.
The transactions are “consistent with our overall strategic objectives of 75-25, though we’d be comfortable taking it to a higher level of variable-rate debt,” Bosscher said. “But we want to make sure we have a high level of fully committed debt that is not subject to any put risk, etc.”
Last year Trinity was forced to restructure a significant chunk of its bonds in order to shed its auction-rate securities and bond insurance after the collapse of those markets.
“That’s why now we have what we think of as a very conservatively managed debt portfolio,” Bosscher said. “There’s no bond insurance, no ARS, it’s 55% fixed-rate underlying, and supported by self-liquidity, which we have a high level of between our bank lines and our investment portfolio.”
Trinity’s finance team considered alternative debt products before opting to offer a relatively straight-forward financing, according to Bosscher.
“We come to the market every year so we have a process that moves pretty efficiently,” he said. “We spent a lot of time looking at the alternatives, and we concluded that for Trinity, in this particular market environment, this combination of plain vanilla fixed- and variable-rate debt made the most sense.”
Among the alternatives the team considered was the Federal Housing Administration’s mortgage insurance program that the U.S. Department of Housing and Urban Development has made available to hospitals.
“The FHA program we would look at, but not for long,” Bosscher said. “It’s neither cost-effective nor efficient from a labor standpoint — there are legal expenses and legal time associated with that — and it doesn’t net out for us at a lower cost structure.”
Like most health care issuers, Trinity has suffered in the recent economic recession, and its operating performance in fiscal 2009 declined nearly 25% under the strain of rising bad debt, charity care, expenses associated with its buildings, and declining admissions, according to credit analysts.
But overall the double-A rated system still enjoys a strong balance sheet and recently completed its fourth straight year of double-digit operating cash-flow margins. Its geographical strength is one of its chief strengths, and even facilities located in the economically weak states of Michigan, Ohio, and Indiana continue to perform relatively well, hospital officials say.
While many health care issuers saw deep declines in liquidity over the last year, Trinity has maintained its strength, with nearly $1.9 billion of unrestricted cash and a bank credit line of more than $900 million.
The system’s internal liquidity allows it to secure its own variable-rate debt, avoiding many of the problems tied to scarce bank credit that have afflicted health care credits trying to issue variable-rate debt. Of Trinity’s $2.6 billion debt portfolio, roughly $1.2 billion is secured by its self-liquidity program. It will also use its own liquidity on the upcoming variable-rate issue.
Trinity spends its own cash on most capital projects and then reimburses itself with proceeds from bond sales. Proceeds from the $250 million new-money portion of the upcoming transactions will reimburse the system for cash it spent to build a 254-bed, acute-care facility in South Bend, Ind., and new buildings and expansions of existing buildings in Ann Arbor, Mich., and Pontiac, Mich.
Another $40 million will be used to refund taxable commercial paper that the system spent to acquire a hospital in Chelsea, Mich., and $35 million will refund outstanding fixed-rate debt in order to achieve a savings.
Despite the weak economies in much of the Midwest, Trinity’s facilities there continue to perform well, Bosscher said. In part that is due to the facilities’ specific locations — in Michigan, Trinity’s hospitals are located in relatively well-off areas in western and northern parts of the state. The system also has a large campus in Columbus, Ohio, which is a bright spot in the otherwise struggling state.
But Moody’s analysts warned that South Bend could pose a challenge. As Trinity builds a new campus there, the existing facility showed a “sizable downturn in performance” last year, Moody’s analysts noted. To address the problems, Trinity hired outside consultants, changed the management team, and increased its focus on partnering with physicians.
As Trinity advances with a capital plan that credit analysts have warned could strain its balance sheet, officials will continue to review the plan in order to maintain manageable debt levels, Bosscher said.
“We know what the medians are for double-A rated entities and our capacity will be driven by that,” he said.