CHICAGO — Drawing more investor interest than it has in the past, New York public health system Nassau Health Care Corp. captured an interest rate of 0.4% Tuesday when it sold $40 million of insured revenue anticipation notes backed by future Medicaid payments.
The system’s credit securitizing of Medicaid payments is a rarity, market participants said.
The transaction also features a lockbox structure and bond insurance from Assured Guarantee, rated AA-minus by Standard & Poor’s and Aa3 on review for downgrade by Moody’s Investors Service. The additional protections allow the unrated Nassau County hospital to access the market without having to rely on the county, officials said.
The hospital uses proceeds of the Medicaid-backed notes to cover operating costs through October, when the federal payments are received.
A piece of this year’s proceeds were also used to make a Feb. 1 pension payment.
Nassau has sold the bonds for the last four years. The health care system is located in Long Island’s Nassau County.
In the beginning it was tough to find interested investors, according to Mike Solomon, a banker with Ramirez & Co Inc., which sold the bonds. Tuesday’s deal, however, was oversubscribed by seven times.
“To go from having a hard time finding one investor to having so many interested is pretty gratifying,” he said. He cited the boost from insurance and the system’s track record in repaying the debt for the improving interest along with increasing market familiarity with the credit.
With the lockbox feature, the state sends the federal payments directly to the Bank of New York Mellon, which holds them solely for the payment of principal and interest.
A back-up pledge requires the hospital to tap money it sets aside monthly for its pension payments to pay off the notes if the federal payments fall short, according to bond documents.
“Our balance sheet is not an investment-grade balance sheet,” said Arthur Gianelli, president and chief executive officer of the hospital. “This product helps smooth out our cash flow and gives us market access despite the weakness in our balance sheet.”
The low borrowing costs — last year’s deal, which was also insured, saw a 0.75% rate — could make it an option for other cash-strapped public hospitals.
“I do think it’s an option out there for folks with balance sheets not as strong as they’d like and where there’s fixed revenues and a strong track record,” Gianelli said. “What we’ve demonstrated is we have a marketable security.”
The hospital has sold the notes every year since 2010, and began buying insurance to lower the rate two years ago. This year’s deal marks its lowest borrowing cost to date.
Coverage rates were around 1.35 times, according to bond documents. The hospital expects the pledged payments to total $55.5 million in fiscal 2013.
Nassau Health has an annual operating budget of roughly $460 million. Medicaid revenues make up 60% of its revenue base, officials said.
Orrick, Herrington & Sutcliffe LLP was bond counsel and Public Financial Management Inc. was financial advisor.