CHICAGO — Sanford Health, one of South Dakota’s largest health care providers, hits the market Wednesday with $120 million of new-money bonds to help finance a $1.5 billion capital plan that has made Sanford one of the region’s fastest-growing hospitals.

Standard & Poor’s downgraded the issuer to A-plus from AA-minus ahead of next week’s deal, warning that its ambitious capital plans could strain its balance sheet. Moody’s Investors Service affirmed its A1 rating and stable outlook, but also said future capital plans could pose a challenge.

Pricing is set for Thursday. Cain Brothers is the underwriter and Jones Day is bond counsel. The South Dakota Health and Educational Facilities Authority is the conduit issuer.

Sanford Health has experienced a period of rapid growth over the last several years. A 2009 merger nearly doubled the size of the system. Since then, it has acquired other providers, most recently a hospital in Bismark, N.D.

Sanford’s growth mirrors the active merger market that characterizes the non-profit health care industry right now, said treasurer Bill Marlette. “Our growth is not unusual for the health care industry right now, at least in the form of mergers,” Marlette said. “In terms of our future growth, we never go where we’re not asked, and we will only go into relevant markets. Our volumes have continued to go up, and we will continue to grow.”

Sanford has nearly $3 billion in annual operating revenue and combined admissions of more than 70,000. Its facilities are located in South and North Dakota, Minnesota, Iowa, and Nebraska.

Its growth has been financed in part by what Standard & Poor’s describes as “extraordinary” support from T. Denny Sanford, a Sioux Falls banker and philanthropist. Sanford has donated nearly $600 million to the system over the past eight years, and future gifts are possible. 

Proceeds from next week’s sale will be used to finance infrastructure development at Sanford’s largest capital project, a $500 million replacement hospital in Fargo, N.D., as well as an acute-care hospital in Thief River Falls, Minn., new clinics in Dickinson, ND in Sioux Falls, and renovation of an acute-care hospital in Sioux Falls.

The system is considering issuing another $300 million of bonds over the next three years to finance its plans, Marlette said. Bond documents show that annual debt service will reach a peak of $71 million in 2014 before gradually declining through final maturity of 2043.

The rapid growth and future plans could strain the system’s balance sheet despite strong revenue, S&P said in its downgrade report. “The [downgrade] reflects our view of the acceleration of Sanford’s larger capital projects in its five-year capital plan, the funding of which will, in our view, lead to a constrained balance sheet characterized by light unrestricted reserves,” S&P analyst Avanti Paul wrote in the downgrade report.

Marlette said the system aims to increase liquidity and reserves as it grows. “Growth puts a stress on the math of days-cash-on-hand,” he said.

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