CHICAGO — A Michigan-based hospital system today will begin converting $125 million in auction-rate debt into a variable-rate mode, while next week Ohio's Lake Hospital System will price nearly $190 million of variable- and fixed-rate revenue bonds, in a pair of transactions that will allow the systems to exit the troubled auction-rate market.
Each hospital system had most if its debt in auction-rate mode, a market that has largely collapsed since February as auctions failed and issuers began to restructure the debt in an effort to avoid unexpected expenses from rising interest rates.
Starting today, Lakeland Hospitals in Niles and St. Joseph Obligated Group in Michigan will begin to convert three series of variable-rate demand bonds into a weekly variable-rate mode. Series A, for $37.1 million, and Series B, for $38.1 million, will mature in 2032. A third series, for $48.5 million, will mature on 2035.
All three series will continue to carry insurance from Financial Security Assurance Inc.JPMorgan Chase Bank NA will provide standby bond purchase agreements.
The Lakeland system operates a 250-bed acute-care hospital in St. Joseph, Mich., located about 90 miles east of Chicago, as well as an 89-bed facility in Niles, which is located 25 miles from St. Joseph. The system carries a total of roughly $122 million in outstanding bonds, all of which will be converted starting today.
The remarketing agent is Morgan Stanley. Dickinson Wright PLLC is bond counsel for the authority. Miller, Canfield, Paddock and Stone, PLC is special counsel to the hospital. The St. JosephHospital Finance Authority is issuing the bonds.
Ahead of the transaction, Fitch Ratings affirmed the insured AAA long-term rating and assigned an F-1 short-term rating. Standard & Poor's is expected also to assign top long- and short-term ratings based on the insurance and liquidity. The deal does not carry underlying ratings.
Separately, the Lake Hospital Systemin Lake County, Ohio, plans to enter the market June 18 with nearly $190 million in health care revenue bonds that will refinance a big chunk of its debt.
Proceeds will be used to refund $70 million in current auction-rate debt, as well as pay off two $57 million bridge loans that the system borrowed in April in order to finance early redemption of roughly $114 million in auction-rate debt.
The system plans to issue three series through Lake County. Two of the series are each for roughly for $57 million, and will be issued as variable-rate revenue bonds. Both will be supported by a letter of credit from JPMorgan Chase. A third series, for $74.2 million, will be sold as fixed-rate revenue bonds.
The auction-rate bonds carry insurance from Ambac Assurance Corp., but the system plans to write that policy off with the upcoming transaction, according to Bob Tracz, chief financial officer of the Lake Hospital System.
Lake currently has about $226 million in outstanding debt, of which roughly $200 million is in some form of a floating-rate structure. Following the transactions, 67% of the debt will be structured as variable rate demand bonds with nearly all of it swapped to a synthetic fixed-rate.
Noting the hospital's large swap program, which totals $137 million, Moody's Investors Service analyst Lisa Martin wrote that the risks generally associated with such a large program are mitigated by the system's large investment portfolio that could cover any termination payments.
"We note with concern, however, that the system is exposed to liquidity risk in the event that the letters of credit are not renewed or repayment of a bank draw is required immediately," wrote Martin in a report on the upcoming debt.
Moody's rates the system Baa1 with a stable outlook. Fitch rates the system A-minus rating. Lehman Brothers is the underwriter. Squire, Sanders & Dempsey LLP is bond counsel, and Andrew Majka from Kaufman, Hall & Associates Inc. is financial adviser.