Sanford Health Deals for Hospitals in Dakotas

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CHICAGO – South Dakota’s Sanford Health is bringing $176 million of A-plus rated hospital bonds to market in a deal that will mark the final financing of the system’s largest construction project.

This week’s transaction will complete Sanford’s financing of a new $500 million hospital in Fargo, N.D.

The new campus is part of a recent spending spree by the South Dakota-based system, which has ramped up its borrowing by nearly 40% over the last two years. Officials began the project 10 years ago, when Sanford merged with a Fargo hospital.

“There hasn’t been a new bed developed in Fargo since the mid-1970s,” said Sanford treasurer Bill Marlette in a telephone interview. “Fargo is now experiencing some great growth, partly because of the oil boom, and partly because we’re the regional center of the area.”

Based in Sioux Falls, S.D., Sanford operates across five states across the Midwest and is one of the fastest-growing systems in the regions. It has 43 hospitals, including one acquired last year. A 2009 merger nearly doubled the size of the system. Fiscal 2015 saw $3.7 billion of revenue.

The deal is set to price Wednesday. It features $176.2 million of A-plus-rated hospital bonds issued through the South Dakota Health and Educational Facilities Authority.

The deal is a mix of serial bonds that mature in 2030 and term bonds that go out to 2035, 2040 and 2045.

Cain Brothers is the underwriter. Chapman and Cutler LLP is bond counsel.

The bonds are secured by a pledge of revenues from the system’s major hospitals and clinics. The bonds are additionally secured by the mortgages on the properties, including the system’s main facilities in Sioux Falls. That pledge, however, could terminate before the bonds mature, according to bond documents.

The $178 million will include roughly $75 million to refund bonds originally issued in 2007 and 2014. The finance team expects to save about $3.3 million over the life of the bonds by refunding in the current market, said Marlette.

“The market has been fairly stable, and we appear to have plenty of demand for our paper,” the treasurer said. “So we anticipate … everything is going to hold.”

The team will hold off on the refunding if the anticipated savings appear to fall short, he added.

Sanford considered doing a private placement for the bonds, as it did last year, but opted for a public deal amid record-low interest rates, said Marlette.

The $100 million of new money includes $25 million for a new project at the Sioux Falls campus.

The project is part of a $125 million gift from T. Denny Sanford, a Sioux Falls banker and philanthropist, who has contributed more than $700 million to the organization.

Previously known as the Sioux Valley Hospitals and Health System, the system renamed itself in honor of Sanford in 2007. The latest gift is dedicated to research to embed genomics into internal medicine, said Marlette.

The remaining $75 million of new-money bonds will be used for the Fargo project. The city itself issued bonds to build roads to the new facility, and Sanford has previously issued more than $400 million of bonds to build everything from water and sewer infrastructure to the buildings.

The 248-bed hospital, set to open in 2017, is Sanford’s largest to date and includes an energy plant and road access and utility infrastructure on 40 acres of land. Combined with the system’s existing Sanford Medical Center Fargo, the system will have three locations with a total of 834 beds.

This week’s deal will increase the system’s debt by $100 million, raising its total debt to more than $925 million. Financing the new Fargo facility has required Sanford to increase its debt by 37% since 2014.

“Once we get past the Fargo project, because that’s really the big project that causes a lot of the capital size, once it gets open we’ll fall back into a normal capital spend that will roughly be depreciation or 110% of that,” Marlette said.

The system does not expect to borrow again until 2019, he said.

The system had 140 days unrestricted days cash on hand as of fiscal 2015, according to bond documents.

The system will have $408.5 million of income available for debt service, with annual debt service expected to total $72.3 million and coverage of annual service totaling 5.65 times. Coverage of maximum annual debt service will total 5.11 times, according to bond documents.

Moody’s Investors Service, which rates the bonds A1, said Sanford is a large and growing regional system that has enjoyed improved operating performance over the last two years. “While Sanford has grown rapidly over the last several years, its balance sheet remains relatively weak,” Moody’s wrote in the report on the latest deal. “The new-money issuances last year and this year, and the construction of a large replacement facility in Fargo, further moderate balance sheet ratios. Long term, the organization expects to build its balance sheet, and to continue with stable and consistent operating results.”

Standard & Poor’s rates the bonds A-plus. The rating is based in part on the system’s same-day liquidity relative to the outstanding self-liquidity debt, analysts said.

“The rating also reflects a generally sound financial profile with a trend of improving earnings and cash flow and adequate balance sheet metrics,” S&P analysts said.

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