Philadelphia Agency Readies $270M for Children's Hospital

The Philadelphia Hospitals and Higher Education Facilities Authority will negotiate a $270 million sale of tax-exempt, fixed-rate bonds Thursday to benefit the Children’s Hospital of Philadelphia project.

A retail order period is scheduled for Wednesday.

The deal will provide $100 million of Series 2011C bonds to fund the hospital’s new five-story ambulatory care center, including an underground parking garage, and $170 million of Series D bonds to refund Series 2008 variable-rate debt. The latter “is a strategy to mitigate future interest rate and credit support risks,” said Thomas Todorow, the hospital’s senior vice president for corporate services and chief financial officer.

JPMorgan is lead manager. Fairmount Capital Advisors Inc. is the financial advisor. Fox Rothschild LLP is bond counsel. Austin McGreal is special counsel to the authority, and Ballard Spahr LLP is counsel to the underwriters.

No insurance or swaps are involved. The bonds are callable in 10 years.

Moody’s Investors Service on Monday assigned a Aa2 rating and a stable outlook. Standard & Poor’s has a AA rating. Moody’s based its rating on the hospital’s national prominence in clinical strengths and research capabilities, leading market position in the Philadelphia region, and strong operating margins.

The Children’s Hospital began in 1855 and on its website describes itself as the first American hospital dedicated exclusively to child care. It has moved three times since opening its doors on what is now Watts Street in downtown Philadelphia. In 1974, the hospital moved to its current location, also downtown, at 34th Street and Civic Center Boulevard.

According to Moody’s, it is the largest independent pediatric hospital in the country with a $1.8 billion revenue base and more than 28,000 admissions annually. Today, the hospital has 430 beds and had more than 1 million outpatient and inpatient visits last year.

In 2009, Children’s Hospital completed a $450 million capital campaign, one of the largest for any hospital in the country, one year ahead of schedule and exceeding its original goal.

Moody’s said challenges include its latest capital project, which will elevate short-term capital spending. The rating agency said the project will keep capital spending elevated for several years at more than 2 times depreciation, though it praised the hospital for its track record at managing large projects. Capital spending was 2 to 3 times depreciation for several years before 2010.

Significant improvement in margins, growth in relative days’ cash on hand, and debt reduction could drive up the rating, Moody’s said, while an unexpected and prolonged decline in operating cash flow and an increase in debt beyond the financing could push it down.

The issuer has $690 million of outstanding debt, which Moody’s affirmed as Aa2 and Aa2/VMIG1.

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