DALLAS -Texas Children's Hospital will refund auction-rate debt sold in 2007 with proceeds from today's negotiated sale of $300 million of variable-rate and term debt issued by the Harris County Health Facilities Development Corp.

The bonds will be issued as three equal series, with $100 million of weekly variable-rate bonds, $100 million of daily variable-rate bonds, and $100 million of term bonds.

Each of the variable-rate series can be converted to daily, weekly, term, flexible, Libor, or fixed-rate mode at the discretion of the hospital. The initial rate period for the term bonds will expire April 29, 2009, at which time the term bonds can be also converted to another mode.

"We're just looking for diversity," said Ben Melson, executive vice president and chief financial officer for Texas Children's Hospital. "We think that diversity and flexibility are important, whether it is diversity in banks or interest rate modes."

All three series carry a final maturity of 2041.

The bonds are triple-A rated based on a standby bond purchase agreement being provided on a so-called several, not joint, basis by JPMorgan Chase Bank NA and Bank of America NA. The agreement, which is scheduled to expire April 29, 2009, provides coverage for principal and 35 days of interest at a maximum of 12% for the purchase price of the bonds that are not successfully remarketed.

Moody's Investors Service rates the unenhanced debt at Aa2 on a long-term basis, with a short-term rating of VMIG-1. Standard & Poor's provides an unenhanced long-term rating of AA with a short-term rating of A-1-plus.

The hospital will have $542.7 million of outstanding debt with the sale.

JPMorgan is underwriter and remarketing agent.

Co-bond counsels are Vinson & Elkins LLP and Bates & Coleman PC. Ponder & Co. is the hospital's financial adviser.

Melson said the term bonds would be priced first, followed by the variable-rate debt.

"The term bonds are the important ones," he said. "The weekly and daily rate debt should fall into line once the term rate is determined.

"We're hoping to lock in a full year at a rate south of 2% on the term debt," Melson said. "We expect the rate on the variable debt will be a little over 2%."

Melson said the hospital is currently paying 5.25% on the $300 million of auction-rate debt issued for it by Harris County in 2007 that was insured by Financial Guarantee Insurance Co. The insurer, previously rated triple-A, has been downgraded to levels between triple-B and double-B as a result of exposure to securities backed by subprime mortgages that are defaulting.

"We didn't have any auctions fail, but the rate went from less than 2% to 4% and then to more than 5%," he said. "That was too much for this nonprofit to take."

The three series of 2007 auction-rate bonds will be called in over the next week at their reset dates, Melson said. The transaction will eliminate almost all the hospital's auction-rate debt.

"I doubt if we'll ever issue auction-rate debt again," he said. "Variable-rate debt is good for us, but we got into something we never anticipated with the auction debt."

Texas Children's Hospital, which is located in the Texas Medical Center district south of downtown Houston, is the largest pediatric hospital in Harris County. It is the primary pediatric teaching and research hospital for Baylor College of Medicine.

The $300 million of debt issued in 2007 helped finance part of the hospital's $1.5 billion Vision 2020 capital plan that includes a new 96-bed children's hospital in west Houston and a new 114-bed maternity center adjacent to the existing facility.

Melson said the hospital expects to issue up to $200 million of debt in 2009 to continue the capital improvement effort.

"We didn't want to issue all the bonds at once, so we sold $300 million in 2007 and expect to sell another $200 million in 2009," he said. "The 2009 sale might be lower, depending on how successful our fundraising efforts are at that point."

The hospital is dedicated to expanding and extending its services, according to Melson.

"We have a lot of children to take care of in this town, and we have more every day," he said. "We also want to move out to the suburbs, because that's where the children are."


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