SAN FRANCISCO - Stanford Hospital & Clinics, which is owned by Stanford University andis one of the world's leading research and medical facilities, is set to sell $250million in revenue bonds Thursday.
The bonds will sold in a negotiated deal led by Bear, Stearns & Co.
The California Health Facilities Financing Authority is the conduit issuer for the new-money offering, which will push SHC's outstanding debt level to $474 million followingthe sale, sources said.
The structure, still developing at press time, is dependent upon negotiations forobtaining insurance, according to Rae G. Boylan, senior managing director at BearStearns. Depending on what financial guarantees are obtained, some of the bonds could besold as variable rate or the entire transaction could be fixed rate.
"Obviously the credit markets are pretty attractive and pretty strong, and the hospitalneeds the proceeds," Boylan said. "A lot of volume is going on in California and beingable to move in such a market is attractive."
About 30% of the proceeds will be used to complete the building of an ambulatory cancertreatment center that will make the hospital more "patient-friendly" by offering easieraccess to facilities, according to Roy T. Santarella, chief financial officer for SHC."It brings the research and clinical research to one location for the patients," hesaid.
The remainder of the Series 2003A bonds will fund other needs at the hospital and itsmedical school, including seismic improvements, information-technology enhancements, andthe rebuilding of network infrastructure to create a more seamless enterprise,Santarella said.
Mike Fitzsimons, a principal at Cain Brothers & Co., which specializes in t health carefinancing, said he had not seen the preliminary official statement but he predictedthere "will be good interest in the loan" if it is structured properly.
Boylan said the "world should be excited" about the bonds, which are rated A3 by Moody'sInvestors Service and A-minus by Standard & Poor's. Fitch Rating does not rate the deal.
Moody's affirmed the A3 rating on outstanding debt and raised the outlook to stable fromnegative, according to Lisa Martin, a senior vice president at the agency.
The hospital has experienced some financial setbacks in recent years. Its 1997 mergerwith the University of California at San Francisco unraveled three years, resulting inlosses.
In addition to funding needed projects, this transaction is important in that it marksthe first time SHC has returned to the market since the "unwinding of the merger,"according to Roger Davis, chair of the department of public finance at Orrick Herrington& Sutcliffe, the bond counsel.
SHC deferred its $40 million capital-spending plan to the university and has sincerepaid the funds now that the university has regained control of SHC.
"A new management team is much more focused on improving operations and has, in fact,not only improved but reversed losses incurred a few years ago," Martin said.
A new upper management team has altered the course of the hospital, but it still faceschallenges, such as increased competition in primary care services. SHC also offershigh-end services such as heart transplants and open-heart surgery, in addition to basicservices.
Moody's said SHC's debt will be fairly high after the new bonds are sold given moderatecash levels. But the cash position should improve because most capital projects will befunded.
Martin said the health care environment in California poses problems.
"Escalating wages, particularly for nurses, is an issue facing hospitals nationally. Itis particularly bad in California because of the heavy concentration of unions and theinfluence unions have. That is the greatest challenge," Martin said.
Santarella said SHC reached agreement with one union last year after a one-day strikewas settled quickly. But SHC doesn't have as many labor problems as some otherhospitals, he added.
"Stanford is uniquely positioned to handle these challenges," Santarella said. "What isunique is that we are operating with a private university and that gives us flexibilitywith strategic choice. We are a small school, not one of the big mammoth schools orhospitals, but we are outstanding in quality and faculty."
The hospital clearly benefits from ownership by the university, he said, noting thatStanford is the largest grant recipient per capita than any other institution and it hasa number of Nobel laureates.
Terry Goode, senior municipal credit analyst at Wells Capital Management, agreed that inspite of challenges SHC faced during the past years, it still remains a premier academicmedical center that is well respected for its quality health care.
"Their balance sheet is probably a bit strained for an A category, but some of the otherpositives somewhat offset that," Good said.
Lisa Zuckerman, an analyst at Standard & Poor's, said SHC has recovered by reducingtemporary labor as other hospitals have done, but it needs to further develop itsphilanthropic base.
A location in the Silicon Valley makes for a lot of innovation," Zuckerman said. Themedical school and hospital work in tandem in terms of research and recruiting, shenoted, and officials try to put different research disciplines in the same building topromote synergy and interaction.
"It is a model that people are moving towards," Zuckerman said.
Santarella said that the relationship among all of the various schools at the universitydistinguishes SHC from other institutions.
"We can go from research and clinical research and bring in engineering scientists,computer scientists, and medical scientists to come up with the techniques, and thetools needed to teach and run through trials," he said. "We are more than just ahospital, but at the clinical end, we can conduct a long series of research anddevelopment."
The bond issue allows SHC to move forward in growth and development, according toSantarella.
The new management team conducted a fiscal turnaround in a relatively short period oftime, he said.
"We need to continue to be profitable, continue to recruit and retain faculty, theresearch is premier and we are implementing and developing research here," Santarellasaid. "We were ranked number 14 by US News & World Report. There is no reason weshouldn't be one of the top five in the country."
Bond counsel is Orrick, Herrington & Sutcliffe.
