CHICAGO - Ohio-based ProMedica Health System plans to enter the market in early May to issue $182 million of hospital revenue bonds that will primarily refund outstanding auction-rate debt that has cost the typically conservative health care system hundreds of thousands of dollars in added interest rate costs in recent months.
The issue will also include $50 million of new-money fixed-rate hospital revenue bonds to finance the construction and expansion of some of the system's clinics.
Kathleen Hanley, ProMedica's chief financial officer said the Toledo-based 10-facility system has used a generally conservative borrowing policy in the issuance and management of its $413 million of outstanding debt, of which only about 17% is floating rate.
The system typically enters the market every few years and last sold debt in 2005. ProMedica has a debt-to-cash-flow ratio of 2.5 times, and the system's cash flow and operating margins have grown for several consecutive years.
"We just really got into [auction-rate securities] not too long ago," Hanley said. "Last fall we started talking about the tainted insurance, and we started watching it. After the rollover effect with the insurers [when auctions began to fail], we were in a pretty good position with an action plan to go ahead."
In early March, ProMedica used a line of credit to redeem its outstanding auction-rate bonds and to staunch the growing expense from interest rates that in some cases rose as high as 15%. Hanley estimated rising interest rates cost the system an additional $300,000 between the end of February through early March.
Originally issued in 2005, the auction-rate debt was insured by Ambac Assurance Corp. For the refunding, officials have secured a letter of credit from UBS. "I've heard horror stories about access to liquidity, so I felt fortunate we were able to do it," Hanley said. "We had some existing relationships that helped. We used our existing banker, but had some other options on a regional basis as well."
The bonds will be issued in four tranches, including the new-money, fixed-rate $50 million tranche. The three remaining tranches, which total $132 million, will be variable-rate hospital revenue bonds and will include two existing two variable-to-fixed interest rate swaps that cover a chunk of the debt. The bonds are secured by a gross revenue pledge of the system's 10-member obligated group.
In addition to issuing the letter of credit, UBS is acting as sole underwriter on the transaction. Squire, Sanders & Dempsey LLP is bond counsel, and Illinois-based Ponder & Co. is financial adviser.
Proceeds from the sale of the new-money piece of the upcoming sale will be used in part to finance the construction and expansion of a cancer clinic and an orthopedic facility.
Despite holding a 45% market share in Toledo and its surrounding counties, ProMedica faces a number of challenges, including competition relatively low margins, flat volume trends, and its operation in the region's troubled economy. "With some plant closures over the last several years, the population of the Toledo area is stagnant to slowly declining," wrote Moody's Investors Service analyst Lisa Martin in a recent report on the system. "As the largest employer in the area as both a provider and insurer, ProMedica is more susceptible to weakness in the local economy."
Moody's assigned initial Aa3 unenhanced and underlying ratings to the bonds.