Northeast Ohio-based University Hospitals hits the market Wednesday with a $400 million tax-exempt issue that will fund in part an expansion of its Ahuja hospital campus.
The bonds will sell through the state.
Ahead of the sale, Moody’s Investors Service and S&P Global Ratings affirmed their A2 and A ratings, respectively, on the system but both moved their outlook to stable from positive. The system has roughly $1 billion of outstanding debt.
Inpatient volume declines coupled with an overall balance sheet that hasn't improved as much as previously expected over the past year along helped drive the outlook change along with the increased balance sheet pressures posed by the additional debt.
Moody’s said that elevated capital spending and margin constraints will limit the system’s ability to improve its investment position, but spending discipline and bond proceeds will stabilize liquidity.
“Leverage will be relatively high for several years, but debt metrics will slowly improve with cash flow growth,” Moody’s wrote.
“Management is addressing several issues behind the softer operating performance, but if operating margins fail to improve to more than 2% or there is additional dilution to the balance sheet, we could consider lowering the rating or revising the outlook to negative,” S&P wrote.
The system’s fiscal 2019's operating income suffered as a result of volume issues and operating expenses related to consolidation of information technology systems.
The largest single impact to operating income however was an $85 million expense related to lawsuits filed against the system that were tied to an unexpected equipment failure that occurred at a fertility clinic it operated, which affected stored frozen eggs and embryos. As of the September 30, 2019, more than 75% of the filed claims related to the fertility clinic matter have been settled.
“Most of the known claims and lawsuits have been handled, but some will be addressed in 2020,” Moody’s noted in a report. “UH reports that additional claims could be asserted in 2020, which could affect performance.”
The system plans to use $252 million of new money bond proceeds to fund the second phase of its Ahuja campus project and make IT investments. The system announced a $200 million project to expand the Ahuja campus in March 2019. The expansion adds a second, five-floor hospital tower and a 64,000-square-foot, two-floor sports medicine complex to the southwest side of the existing buildings. Construction is slated to be finished in 2022.
The remaining bond proceeds will be used to refund bonds the system issued in 2007, 2010 and 2012.
Over the next several weeks the system is also expected to issue roughly $100 million of variable-rate direct placement bonds.
Barclays, BofA Securities and Morgan Stanley are co-senior managers. Fifth Third Bank and Wells Fargo are co-managers. Kaufman Hall is advising the system and Squire Patton Boggs LLP is bond counsel.
The bonds are secured by a pledge of gross revenues of members of the Obligated Group. The Obligated Group consists of the University Hospitals Health System Inc., University Hospitals Cleveland Medical Center, University Hospitals Geauga Medical Center, University Hospitals Ahuja Medical Center, Parma Community General Hospital Association, EMH Regional Medical Center and University Hospitals St. John Medical Center.
With the issuance of the Series 2020 bonds, the system expects to receive consent from at least a majority of the holders of Master Notes to make certain amendments to the MTI. These amendments include the deletion of the indebtedness to capitalization ratio covenant that requires the Obligated Group to maintain an indebtedness to capitalization ratio of not greater than 70% at the end of every fiscal year.
