CHICAGO — With an upgrade in hand from Moody’s Investors Service, St. Cloud, Minn.-based CentraCare Health System today will price for institutional buyers nearly $200 million of fixed-rate refunding bonds.

CentraCare took retail orders yesterday. The city of St. Cloud is serving as the conduit issuer. JPMorgan is the underwriter and Ponder & Co. is financial adviser.

Proceeds will refund a chunk of the system’s existing fixed-rate debt portfolio.

“The refunding is primarily for present-value savings of at least 3% and to smooth out our maximum annual debt service so that it is level,” said Tammi Koosmann, CentraCare’s treasury director. She was hired about three months ago as part of the system’s efforts to enhance its management staff.

Ahead of the sale, Moody’s upgraded CentraCare’s $430.7 million of debt to A2 from A3 and Fitch Ratings affirmed its A rating. The upgrade “reflects improved balance-sheet metrics and continued strong financial performance, a reallocation to more conservative debt and investment portfolios, and the system’s leading market position,” Moody’s analysts wrote.

The deal — secured by a pledge of the obligated group’s unrestricted receivables — follows the system’s summer conversion of some of its variable-rate debt to a fixed rate and the diversification of its bank exposure and renewal risk.

Moody’s praised the system for making significant strides in reducing its debt risks, lowering its put risks to 29% of its total debt from 47% earlier in 2009. The system also has adopted a more conservative investment strategy.

CentraCare has also seen a marked improvement in its balance sheet, with unrestricted cash and investments increasing to $288 million for the first quarter of fiscal 2010 from $270 million at the close of fiscal 2009.

Its operating profitability helps mitigate a decline in liquidity, according to Fitch.

The system also enjoys a dominant market position in the 12-county region it serves between Duluth, the Twin Cities, and Fargo, N.D., due to its size and array of services.

Its position is bolstered by a large employed physician medical staff that supports a successful regional referral strategy.

Its challenges include renewal risks stemming from its variable-rate bonds, with its letter of credit and standby bond purchase agreements terminating next August, and construction risk associated with the building of a new nine-story tower that will not be completed until fiscal 2012. The system saw an increase in patient volume last year, but early 2010 results show a decline.

The shift to more fixed-rate debt has helped ease some worries over floating-rate volatility and the need for collateral postings in connection with its swap contracts, though concerns remain.

“Significant collateral posting has been required over a $15 million threshold and collateral requirements are measured daily,” Moody’s analysts wrote. “Collateral posted as of Dec. 30, 2009, was $6.95 million, a material reduction from a peak level of $39.8 million at January 2009.”

The system operates the 489-bed St. Cloud Hospital, a 202-physician clinic, two critical access hospitals, and long-term facilities that generated $737 million of revenue last year.

The system has no plans to issue new debt for at least the next five years.

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