PHOENIX - San Diego-area Palomar Health is set to issue more than $400 million of refunding bonds in the next two weeks, split between investment-grade general obligation debt and junk-rated revenue bonds.

The bonds are set to price in two deals the weeks of Sept. 26 and Oct. 3. First up will be about $213 million of GO bonds rated triple-A by Fitch Ratings and A2 by Moody's Investors Service. The revenue bonds to sell a week later are rated BB-plus by Fitch and Ba1 by Moody's.

The GO bonds will refund portions of outstanding 2005 and 2007 GO bonds, and the revenue bonds will refund outstanding 2009 revenue bonds. Net present value savings are significant at over 10% of refunded par for both the GO and revenue bond transactions, Fitch said.

The wide split in the ratings of the GO and revenue bonds, particularly from Fitch, is partially the result of expectations about how the bonds would be treated in a bankruptcy scenario.

"The 'AAA' rating on the series 2016 GO refunding bonds is supported by legal opinions provided by PH's bond counsel that provide a reasonable basis for concluding that the tax revenues levied to repay the series 2016 GO bonds would be considered 'pledged special revenues' in the event of a bankruptcy of PH and not subject to automatic stay," Fitch said.

The GO bonds are backed by ad valorem property taxes approved by voters in the Palomar hospital district for the specific purpose of repaying GO bonds.

Fitch rates over $400 million of outstanding Palomar Health GO debt at A-plus and is evaluating it pending an opinion from PH's bond counsel as to whether the outstanding debt would also be considered "pledged special revenues" in a bankruptcy setting.

If so, Fitch said, the outstanding bonds would be upgraded to triple-A as well.

The revenue bonds are another story.

Despite its solid competitive footing in San Diego County, improving financial performance and a strategic closing of one campus that is projected to increase the system's efficiency, Palomar remains quite debt-burdened, analysts said.

"The district is highly leveraged with $1.1 billion in outstanding debt, divided roughly evenly between revenue bonds and GO debt," Moody's wrote. "Debt metrics related to the revenue bonds are particularly elevated with unrestricted cash and investments in FY 16 equal to 37.7% of revenue bond debt, and revenue bond debt to operating revenues at 74.4%. Tax base debt is more moderate, with a direct debt burden of 0.62%, and an overall debt burden of 3.23%."

It has also struggled with liquidity, at one point in fiscal 2013 falling to barely more than two months cash on hand but since rising to back above 100 days. Both agencies said that stronger financial performance and improved liquidity could net Palomar's revenue bonds an upgrade, while a return to the weaker numbers of two years ago could see them downgraded.

Palomar is California's largest local health care district serving approximately 539,000 residents over about 800 square miles. It owns and operates two hospitals as well as the downtown campus hospital that is currently in the process of being closed. Palomar also has a nursing facility adjacent to one of its hospitals.

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