Catholic Health East Wednesday will convert $171.8 million of variable-rate bonds based on the London Interbank Offered Rate into fixed-rate mode in a multi-state transaction, but $74 million of similar bonds issued through a New Jersey conduit are absent from the offering.

Catholic Health officials and the New Jersey Health Care Facilities Financing Authority are in disagreement over certain collateral provisions that the agency requires from its borrowers when entering swap agreements.

The health care provider will be heading to market without the authority, since the two parties were unable to reach consensus last week.

Originally, Catholic Health was planning on converting $74.1 million of variable-rate bonds pegged to Libor into fixed-rate bonds through the HCFFA.

The authority restricts borrowers from covenanting to post collateral to derivatives counterparties if its days' cash on hand falls below a certain level, in order to keep those funds available to bondholders.

Catholic Health believes that the conduit's stipulation limits the organization in the marketplace and could hurt bondholders in the long run, according to Randy Schultz, vice president for capital strategy and management.

"It could potentially cause a termination of a swap at a point in time when it would be unfavorable for that to happen and it could also happen at a time when the swap is actually providing positive cash flows," Schultz said. "So it could have two negative affects: it can reduce the cash balance of the organization and it could take away positive income, so, just the opposite of what I think the intent is. And that was our argument but we could not come to an agreement."

HCFFA executive director Mark Hopkins said without the collateral restrictions, bondholders could have less access to Catholic Health funds as the provider might need to redirect revenues towards a swap counterparty to collateralize a derivative.

"Our concern has been protecting the bondholders," Hopkins said. "We're sensitive to the market right now, which may make it tougher for some borrowers to get into the market. It may make it tougher for some borrowers to get swap agreements, but the bondholders are expecting the security that is in the documents. I think that they are not on sufficient notice without this protection that some collateral could be pulled out from under them and that is our main concern, to make sure the bondholders are protected in that way."

Hopkins said Catholic Health runs a tight ship, financially speaking.

Schultz said the company would continue trying to reach an agreement with the authority to potentially refinance the Libor-based bonds in the future.

Merrill Lynch & Co is book-runner and Goldman Sachs & Co. is co-senior manager on the deal. Hawkins, Delafield & Wood LLP is bond counsel. Kaufman, Hall & Associates Inc. is the outside financial adviser.

Schultz said Catholic Health has a net present-value savings threshold of 2% for the deal and that bondholders are receptive to the switch to fixed-rate mode from Libor.

"It presents them with liquidity and helps us on our balance sheet," Schultz said. "So that's why we're moving forward with this."

The sale will refinance $93.5 million of Series 2007A Fulton County, Ga., Development Authority bonds, $20.5 million of Series 2007B Athens Unified Government Development Authority debt, $51.4 million of 2007C Massachusetts Health and Educational Facilities Authority bonds, $17.1 million of Series 2007D Montgomery County, Pa., Higher Education and Health Authority debt, and $49.3 million of Series 2007F Saint Mary Hospital Authority of Pennsylvania bonds.

Terminating swaps associated with the Libor bonds will cost roughly $68 million, Schultz said.

Moody's Investors Service rates the deal A1. Last week, Moody's revised Catholic Health's outlook to negative from stable, citing a decline in liquidity. Fitch Ratings and Standard & Poor's rate the credit A-plus and A, both with a stable outlook.

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