CHICAGO - Minnesota-based Essentia Health early next month will sell nearly $400 million of mostly tax-exempt new-money and refunding bonds through three separate conduits to finance the acquisition of a hospital and physicians group in North Dakota.

Various pieces of the overall deal will sell through the Wisconsin Health and Educational Facilities Authority, which approved the sale on Friday, Cass County, N.D., and the Minnesota Agricultural and Economic Development Authority.

Goldman, Sachs & Co. and Piper Jaffray & Co. are the senior managers. The deal includes about $150 million of new money, with the remainder refunding outstanding fixed-rate debt both for savings and restructuring purposes. The final maturities will be pushed out by several years.

The system has opted to use a variable-rate structure with liquidity provided by three banks - KBC Bank NV, Wells Fargo Bank NA, and US Bank NA - and insurance coverage from Assured Guaranty Corp. The system expects to avoid the interest rate issues some other borrowers have had with that structure due to the strength of Assured Guaranty's backing.

Some borrowers with outstanding liquidity-backed, insured floating-rate debt are reconsidering their use of that structure due to dramatic spikes in interest rates when the bonds are remarketed of late as investors demand more yield over credit concerns tied to the subprime market collapse.

"Assured Guaranty still has strong trading value and is sought after," said Piper Jaffray public finance banker Steve Proeschel. While many of the other triple-A insurers have seen their credit battered and in some cases downgraded due to exposure to subprime securities, Assured is considered relatively insulated from the fallout because of limited exposure, helping to boost its market share.

Essentia has entered into swaps to synthetically fix much of the upcoming sale with counterparties Goldman and Piper Jaffray Financial Products. Essentia will pay rates between 2.85% and 3.25% depending on the individual swap and receive 68% of the London Interbank Offered Rate.

Both Fitch Ratings and Standard & Poor's affirmed the health system's A-minus credit late last year and are expected to issued updated ratings before the pricing. Standard & Poor's assigns a positive outlook and Fitch a stable one.

Essentia was formerly known as the Benedictine Health System-St. Mary's Duluth Clinic Health System. The new money from the deal will finance the acquisition of the Dakota Clinic, a 160-physician group located throughout western Minnesota and eastern North Dakota, and Innovis Health, an 86-bed hospital in Fargo, N.D.

"Fitch views this acquisition positively as it switches Essentia's focus more towards the acute care side and away from the long-term side, which has historically been less profitable for Essentia," analysts wrote. Much of the system's long-term care business will shift to a separate entity operated as Benedictine Health System.

Essentia's major facilities will remain St. Mary's Medical Center, the Duluth Clinic, and St. Joseph Medical Center. The system generated revenues of $1.2 billion in fiscal 2007.

Separately, the Wisconsin Health and Educational Facilities Authority board last week also approved resolutions that allow the authority's staff to negotiate new bond structures for its borrowers with outstanding floating-rate, insured structures without returning to the board for approval.

"We wanted to be able to meet the needs of our borrowers to execute restructuring plans quickly," said Lawrence Nines, executive director of the authority.

The agency has 20 borrowers with 32 bond issues totaling $2 billion that use has some piece of floating-rate debt with a liquidity-insured backing and some have seen unaffordable spikes in their interest rates following recent remarketings.

The authority has restructured St. John's Home of Milwaukee's $17 million floating-rate deal that was insured by Radian Asset Assurance, downgraded last year to A-plus from AA, and last week approved a restructuring for Beloit Memorial Hospital. Both restructurings add another layer of security - a direct pay letter of credit - to the deals. q

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