CHICAGO - The Cleveland Clinic Health System will begin taking retail orders today on $800 million of fixed-rate revenue bonds that includes $500 million of new money and $300 million of refunding bonds.
Institutional sales will be held tomorrow.
The transaction will allow the system to finance a number of construction projects, decrease the amount of variable-rate debt in its debt portfolio, and free up some liquidity that now backs its variable-rate debt.
One of the country's top hospital systems, the Cleveland Clinic enjoys a strong international reputation and top market position in northeast Ohio. President Obama recently visited the clinic to promote it as a model for health care systems under his reform plan. The system's capital plan includes a number of expansions and new facilities aimed at increasing its volume and decreasing risks associated with the region's weak economy.
The Ohio Higher Educational Facility Commission will act as conduit issuer on today's transaction. JPMorgan is senior book-running manager, with Merrill Lynch & Co., Morgan Stanley, PNC Capital Markets LLC, and Wells Fargo Securities also on the underwriting team. Squire, Sanders & Dempsey LLP is bond counsel to the commission and Jones Day is special counsel to the clinic. Melio & Co. is the financial adviser.
The $800 million transaction includes $500 million of new money, nearly double the amount of debt than the clinic originally planned to issue. The decision to increase the debt - and sell it a year earlier - was in part based on the current market, according to chief financial officer Steven Glass.
"We were anticipating not coming out until 2010 with financing but we were looking at markets and thought they looked pretty attractive going through the summer," he said. "It's an attractive time to go, and plus we're a little bit concerned about what the market is going to look like in two years."
Moody's Investors Service, while affirming its Aa2 rating on the system's debt, revised its outlook to negative from stable, citing the increased debt issuance, which analysts said would lead to ratings below the Aa2 category. Standard & Poor's rates the debt AA-minus with a stable outlook.
Refinancing $300 million of existing variable-rate demand bonds will allow the clinic to increase the amount of fixed-rate debt in its portfolio and free up the liquidity now used to back the 2008 VRDBs, Glass said.
"As we looked at risk across the organization, we were willing to take additional costs of fixed-rate [debt] to take the future interest rate risk off the table," he said. "We also wanted to take down the liquidity requirements on the 2008 VRDBs."
Like other large health care systems that refinanced failed auction-rate debt last year, the Cleveland Clinic opted to issue VRDBs backed by its own liquidity in part to avoid rising credit enhancement fees amid a general credit crunch. Since then, the system has begun to reassess its investment policies, Glass said.
"A year later, we're looking to take down some of that liquidity, and take that money and put it into the market later this year," he said.
Despite $500 million in investment losses last year, the clinic has 178 days' cash on hand, Moody's noted. After this transaction, the clinic's $2 billion debt portfolio will be roughly 75% fixed rate and 25% variable rate.
The clinic expects to spend $700 million annually through 2012 on capital projects but it's uncertain how much would be financed through debt and how much through cash.
