CHICAGO - The Missouri Health and Educational Facilities Authority meets tomorrow to sign off on transactions for two major St. Louis health care systems, including SSM Health Care, which will raise $100 million of new money and restructure $580 million of insured variable-rate and auction-rate debt beginning this week.

Sisters of Mercy Health System Inc., also based in St. Louis, is planning next week to restructure $109 million of auction-rate debt to a variable-rate demand mode backed by standby bond purchase agreements. The authority is serving as the conduit for both systems.

SSM on Wednesday will price $100 million of fixed-rate bonds for various projects. The system's sale will begin on Thursday and continue through at least the next week to restructure various series of auction-rate and insured variable-rate bonds that were originally sold in 2005. Citiand UBS Securities LLC are managing the issues.

The system will shift two auction-rate series for $168.9 million and $140.7 million to variable-rate demand bonds that will carry either a letter of credit or standby bond purchase agreement. SSM also will restructure a $194.5 million variable-rate deal that carries insurance from Financial Guaranty Insurance Co., dropping the insurance coverage.

On a separate $72.7 million variable-rate series insured by Financial Security Assurance Inc., SSM will substitute the current liquidity provider and leave intact the insurance. FSA retains its triple-A rating but FGIC is currently rated in the double-B to triple-B category.

Fitch Ratings and Standard & Poor's affirmed the system's AA-minus and stable outlooks on about $1 billion of debt ahead of the sale.

SSM's high rating reflects its geographic diversity, strong liquidity position, continuing operating profitability and strong cash flow that has allowed the system to invest heavily in capital projects without hurting debt service coverage ratios over the last three years.

The system had $1.5 billion of unrestricted cash that provided 238 days cash on hand and 139% of debt. The hospital's elevated capital spending is expected to continue for several years with a replacement facility planned in the St. Louis area and a new hospital planned for Janesville, Wis.

One trouble spot, its struggling 410-bed St. Francis Hospital and Health Center in Blue Island south of Chicago, is expected to be resolved soon. St. Francis has been on the block for more than a year and unable to find a buyer, SSM announced last month it would close the facility but now officials are in negotiations with a for-profit buyer. The hospital has suffered operating losses of $40 million since 2002.

SSM operates facilities in Illinois, Missouri, Oklahoma, and Wisconsin, including 15 acute-care hospitals, two long-term care facilities, and one rehabilitation center.

"It's a very strong credit with strong centralized management that pays attention" to hitting financial targets and are addressing some trouble areas like St. Francis' losses, Fitch analysts said on Friday.

Beginning next week, Sisters of Mercy will restructure $109 million of auction-rate debt that originally sold in 2004 to a variable-rate demand mode. Banc of America Securities LLC, Bear Stearns & Co., and JPMorgan are the remarketing agents on the debt that will carry liquidity support.

Sisters began to see failed auctions on that tranche in February as most other borrowers also did as buyers pulled their investments amid the market's credit crunch and downgrades of insurers.

Sisters' tranche hit a maximum of 12% permitted under the bond covenants after a failed auction, said Jack Fox, executive director of treasury services. The system began in late March submitting its own bids at auction to bring down interest costs and as of last week held about 60%.

Sisters has another $380 million of auction-rate bonds that sold in 2001, but the maximum rate that is set on those bonds in a failed auction is tied to an index-based formula and has ranged from 2 to 4%. Because the rates have not shot up, Fox said the hospital is still "reviewing its options."

Many issuers are leaving some debt in auction-rate mode, waiting to see whether the dire predictions for the market's demise pan out or if buyers will remain.

In conjunction with the sale, Standard & Poor's downgraded the credit to AA-minus from AA, attributing the move to low liquidity, an unexpected drop in operating income, and continued high capital spending. Mercy operates 18 acute care hospitals and two heart hospitals in five states.

The system is considering issuing $250 million to $300 million later this year for capital projects.

"The stable outlook reflects the likelihood that Mercy's business position in its key markets will be stable or improving, while liquidity has probably bottomed out and is likely to begin to rise if investment markets recover, and the new money is issued later in 2008," Standard & Poor's analyst Liz Sweeney wrote.

Moody's Investors Service rates the system Aa2.

 

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