LOS ANGELES — Palo Alto, Calif.-based Lucile Salter Packard Children's Hospital received double-A-level rating, including one downgrade, ahead of plans to price $100 million in fixed-rate revenue bonds and $100 million of unrated, private placement, variable-rate bonds the week of April 28.
The California Health Facilities Financing Authority will act as conduit issuer for the bonds , which will help fund a $1.2 billion expansion of the Stanford University-owned not-for-profit hospital.
Standard & Poor's downgraded the hospital's long-term and underlying rating to AA-minus from AA on April 22, with a stable outlook.
"While LPCH continues to have a very strong enterprise profile, the lowered rating reflects the considerable capital spending associated with LPCH's master facility plan that we believe will pressure its balance sheet through fiscal 2017, due to this 2014 debt issuance and a planned spend down of unrestricted reserves in fiscals 2016 and 2017," said Standard & Poor's credit analyst Geraldine Poon. "Once the master facility plan is complete, we believe that LPCH has the capability to rebuild its balance sheet with metrics that are more consistent with a higher rating."
Moody's Investors Service on April 23 affirmed its Aa3 rating, saying while the $200 million of additional debt stresses debt ratios it believes the organization's operational and strategic plan places the organization in a position to absorb these challenges.
Fitch Ratings affirmed its AA rating on April 22.
The 311-bed hospital has a leading market position, but also an acute shortage of patient beds that the expansion intends to address.
The hospital plans to construct two five-story patient towers to increase the bed total to 369 and convert its existing semi-private rooms to private, according to a CHFFA staff report.
Morgan Stanley will underwrite the tax-exempt fixed-rate revenue bonds. The private placement bonds will initially be placed with Northern Trust for 10 years.
After the series 2014 issuance, LPCH's outstanding debt will total $542 million, and the debt mix is conservative with 82% fixed rate and 18% variable rate, according to Fitch's report. There are no swaps outstanding.
The series 2014B direct bank loan is the only variable rate exposure and will be at an indexed floating rate for an initial period of 10 years. The $93 million series 2008A-C bonds were remarketed in 2012 as five-year fixed rate put bonds, and will be remarketed in 2017, according to the report.
Maximum annual debt service remained at $31.3 million with this issuance, Fitch analysts said, since debt service was back-loaded with the series 2012 issuance. Debt service coverage is adequate at 4.5 times through the six months ended Feb. 28, 2014.
Inclusive of the 2014 bonds, the hospital's debt has more than tripled since 2011 in support of the project, according to Moody's analysts.
LPCH is located on Stanford's campus, and along with Stanford Hospitals and Clinics, the two organizations are the primary clinical affiliates of the Stanford University School of Medicine. LPCH, SHC and the University are closely aligned, but remain distinct credit entities. LPCH recently launched a rebranding campaign and the organization is now known as Stanford Children's Health.
LPCH has significantly expanded its network by adding a medical foundation in 2011 that allowed community physicians to become aligned with LPCH, in addition to an aggressive ambulatory care strategy to have presence within 10 miles of most family households in the Bay Area..
Macias Gini & O'Connell, LLP, is CHFFA's financial analyst. Fieldman, Rolapp & Associates Inc. is the authority's financial advisor. Hammon Hanlon Camp is the hospital's financial advisor. Orrick, Herrington & Sutcliffe is bond counsel.
