CHICAGO -OhioHealth today plans to sell $186.7 million of variable-rate demand revenue bonds to refund five-year-old auction-rate securities.

The bonds are backed by a standby bond purchase agreement with JPMorgan Chase Bank NA.

Ahead of the deal, Moody's Investors Service upgraded the system's debt to Aa2 from Aa3, citing a strong operating performance and debt measures. Both Standard & Poor'sandFitch Ratingsaffirmed a AA rating with stable outlook on the system.

OhioHealth's strong credit rating helped to secure liquidity, said Richard McKeown, vice president of treasury for the system.

"The good news is that since we're a strong credit that's starting to pay off for us," he said. "Before the spread between As and triple-Bs weren't that wide, but now the stronger credits have a lot easier time accessing credit."

McKeown noted that a credit's underlying rating has also become more important in the pricing of the bonds. The cost of liquidity has increased and negotiations over bond covenants have become tougher in the current market, he said, as investment banks find themselves amid their own credit crunch as well as a sharp increase in demand from issuers seeking to avoid the troubled bond insurance market.

The cost of liquidity has increased about 50% since last summer when OhioHealth secured letters of credit on another deal, McKeown said. And the terms of the agreement, such as when the liquidity provider can terminate the agreement, have become more of a focus.

"We spent a lot more time talking about covenants than we have in the past," he said.

The system's standby bond purchase agreement with JPMorgan includes termination events that are linked directly to the credit quality of OhioHealth - another measure that could widen the gap between lower- and higher-rated health care credits.

Citi, the system's longtime underwriter, will act as lead underwriter on the transaction. Bond counsel is Squire, Sanders & DempseyLLP. Chicago-based Ponder & Co. is serving as financial adviser. Franklin County will act as the conduit issuer for the transaction.

OhioHealth owns eight hospitals and is affiliated with nine additional hospitals in the Columbus area, where it holds a leading market share. The system last year reported $1.7 billion in revenue. One of its chief challenges is competition, though management has implemented "sound strategies" to meet the challenge, Moody's said.

While the auctions on the system's debt began to fail earlier this year, most of the interest rates were capped at a maximum rate of around 4.5%. That helped keep down interest costs on the debt - as did the Federal Reserve's lowering of interest rates this year. The auction-rate securities were insured with MBIA Insurance Corp.

"We were paying higher interest on the tainted [ARS] bonds than on our weekly floaters, but relatively speaking we did okay because the Fed's easing brought absolute rates down," McKeown said. "Ironically we were right on budget for interest expenses this year."

OhioHealth plans to issue about $200 million of new money early in 2009 to reimburse itself for capital expenditures.

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