CHICAGO — Minnesota’s largest not-for-profit health care provider, Allina Health System, enters the market next week with the first piece of its nearly $400 million new-money and refunding issue with a trifecta of upgrades in hand — a rarity for the hard-hit sector.

Allina will hold a retail order period on Monday for its $225 million of fixed-rate bonds and open it up to institutional buyers on Tuesday. Floating-rate series for $114 million and $50 million will follow the next week, according to Laurie Lafontaine, Allina’s vice president of finance and treasury.

Goldman, Sachs & Co. is the senior manager. JPMorgan, Wells Fargo Securities, and Piper Jaffray & Co. are also on the underwriting team. Kaufman Hall & Associates is financial adviser and Dorsey & Whitney LLP is bond counsel. Minneapolis and the St. Paul Housing and Redevelopment Authority are serving as conduit issuers a. JPMorgan and Wells Fargo are providing letters of credit for the variable-rate bonds.

Proceeds of the sale will generate about $50 million in new money to finance various projects, including the construction or expansion of clinics. They also will be used to complete the restructuring of Allina’s floating-rate debt, impacted by the collapse of the triple-A rated bond insurers and the auction-rate market. Proceeds also will cover the $17 million cost of terminating swap agreements tied to a piece of variable-rate debt being converted to a fixed-rate.

Allina will refund its $217 million of 2007 variable-rate bonds that carried insurance from MBIA Insurance Corp. After MBIA was downgraded last year, the liquidity provider, Bank of New York Mellon, placed the bonds in its custodial receipts program and reissued them with its own LOC wrap. That helped keep interest rates low and eliminated the need to move quickly to refund the bonds. The expiration of that LOC in January drove the timing of the upcoming transaction.

Allina also would use proceeds of the deal to cover any of its 1998A auction-rate securities that are tendered by holders under a conditional tender offer that pays 93% of par. Allina reserves the right to rescind the offer depending on market conditions. Those securities also carried MBIA insurance.

“With this issue we are moving more of our debt into a fixed rate so that about half of our portfolio will be fixed,” Lafontaine said. “We did a capital structure risk assessment and feel this puts us in a good spot for an organization of our size.”

Ahead of the sale, Fitch Ratings and Standard & Poor’s upgraded the credit to A-plus from A and Moody’s Investors Service upgraded the rating A1 from A2 in recognition of the system’s improved operations. Market participants estimated a savings of 10 to 20 basis points due to the upgrades. The system has about $700 million of debt.

“The rating reflects continued improving operations, with an operating margin of 4.9% for the first six months of fiscal 2009 and 3% as of fiscal year-end 2008; strength as the leading health provider in a very competitive metropolitan Twin Cities market, with a 32% market share,” analyst Standard & Poor’s Brian Williamson wrote.

The credit also benefits from a low debt level for a system of its size and revenues and an experienced management team that has helped steer the $2.8 billion system through the recession and its successful completion a new electronic medical record information platform. The system is also undertaking a $250 million multi-year cost-cutting program to maintain profitability.

Its challenges include low liquidity levels at its rating level, with 114 days’ cash on hand, according to Moody’s, upcoming collective bargaining with its nursing union, and competition from other large systems that operate in the Twin Cities region. The opening later this year of a new Maple Grove hospital owned by Fairview Health System and poses an acute threat to Allina’s Unity Hospital.

Allina operates 11 hospitals — including its flagship Abbot Northwestern Hospital in Minneapolis — in the Twin Cities region, making it one of the state’s largest employers. The system’s 115,000 admissions helped generate $2.8 billion in annual operating revenues last year.

Though the system saw strong growth of revenue of 11.3% in 2008 over 2007, it revenues are up a more modest 5.1% for the first half of fiscal 2009 and it did see a decline of 1% in inpatient and outpatient admissions.

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