Missouri's CoxHealth in $265M New-Money, Refunding Deal

CHICAGO - CoxHealth of Springfield, Mo., enters the market today with the first piece of a new-money and refunding transaction for $265 million that will finance a series of expansion projects and restructure outstanding insured floating-rate bonds hit with higher rates due to insurer downgrades.

Fitch Ratings assigned an A rating to the issue and Moody's Investors Service assigned an A2. The ratings impact a total of $340 million of debt, including the new money from the upcoming issue. The Missouri Health and Educational Facilities Authority is serving as the issuer on CoxHealth's behalf. Merrill Lynch & Co. and Oppenheimer & Co. Inc. are the underwriters and Gilmore & Bell PC is bond counsel.

The transaction begins with the pricing today of $159 million of fixed-rate new money and refunding bonds. Later this month, the system will sell two additional series of variable-rate bonds, one for $70 million that is expected to be supported by a letter of credit from the Bank of Nova Scotia and another for $35 million that is expected to carry an LOC from Bank of America NA.

The system will use nearly $100 million from the deal to finance a new emergency department, a new ambulatory surgery center, a new parking garage, a new office building, and to renovate space that will be used in the future for orthopedic services. Another $53 million will finance other routine improvements and $15 million will reimburse the system for past capital expenses.

About $22 million from the transaction will refund variable-rate debt sold in 1997 and another $58 million will refund floating-rate debt sold in 2002. MBIA Insurance Corp. insured the 1997 piece and Ambac Assurance Corp. insured the 2002 debt.

The system entered into a fixed-spread basis swap with Merrill Lynch Capital Services Inc. on the fixed-rate piece of the deal in which CoxHealth will pay a floating rate based on the Securities Industry and Financial Markets Association's municipal swap index. The system will receive a floating rate based on 67% of one-month of the London Interbank Offered Rate plus 44 basis points, according to the preliminary official statement.

CoxHealth operates three hospitals with a total of 802 beds, providing services to a 22-county area in southwest Missouri and northern Arkansas. The system also operates a skilled nursing facility, a psychiatric and rehabilitation facility, more than 50 outpatient physician clinics, a home care company, a for-profit health plan, and a foundation.

The facilities generated revenues of $948 million in fiscal 2007. The system enjoys a leading market position in its primary service area of about 37% that's helped strengthen its unrestricted cash position reported through May at $302 million despite the need to reserve $60 million to settle a U.S. Department of Justice probe.

The settlement resolves a three-year-old federal investigation stemming from CoxHealth's self-reporting of Medicare billing errors that occurred in 2005 and physician compensation issues. The settlement calls for an initial payment of $35 million with five additional $5 million payments annually with an annual interest of 4% on the deferred amounts, according to Moody's.

In a separate agreement with the U.S. Department of Health and Human Services' inspector general's office, CoxHealth agreed to participate in a five-year program of intensified legal compliance education for employees, physicians, and other system affiliates that calls for heightened monitoring.

"Fitch believes CoxHealth's robust corporate compliance function protects bondholders from future substantial cash outlays due to compliance issues and believes the settlement now allows management to focus on the core operations of CoxHealth, which should further strengthen performance," analysts wrote.

The system's operating results have steadily improved since the billing errors of 2005 due to growth in both imaging services and cardiovascular services and improved surgical volumes. Cox management hopes to achieve improved results in fiscal 2009 due to consultants' recommendations, Moody's wrote.

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Healthcare industry
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