CHICAGO — The University of Chicago Medical Center will enter the market with $182 million of debt beginning next week to wrap up its planned borrowing for a new hospital pavilion that will house its complex-care services.
The medical center — which operates a health care campus on Chicago’s south side — will use the Illinois Finance Authority as conduit issuer for $90 million of fixed-rate bonds on May 11. It will follow up with the sale of $92 million of variable-rate bonds in two equal tranches on May 16, said hospital treasurer Ann McColgan.
“This is the final phase of financing for the new pavilion, which is essential to our strategy to promote our complex-care and specialty services,” she said.
Melio & Co. is financial adviser to the hospital. Jones Day is bond counsel. Bank of America Merrill Lynch, Wells Fargo Securities, JPMorgan, Cabrera Capital Markets LLC, and Loop Capital Markets LLC make up the underwriting team. Bank of America and Wells Fargo Bank will provide letters of credit on the floating-rate securities and serve as remarketing agents.
The medical center’s services have a national and in some cases an international draw. The pavilion will serve as home for UCMC’s cancer, gastrointestinal, neuroscience, advanced surgery and high-tech imaging services. It will include two shelled floors for future expansion. Construction began in 2009 on the new tower that includes a rooftop helicopter landing pad, and is expected to be open in early 2013.
Construction so far is on time and within budget. The $700 million project relies on about $500 million of borrowing with the remainder paid for with cash on hand and through fundraising and gifts. The medical center operates three hospitals — a main adult patient care facility, a women’s hospital, and a children’s center — in addition to an ambulatory care facility.
UCMC issued $225 million for the pavilion project in 2009 and $92.5 million last year. After completing the upcoming sale, it will take a break from borrowing with no plans to tap the tax-exempt market for at least the next few years, according to McColgan.
As it put together a financing plan for the new tower, UCMC entered into forward starting, floating-to-fixed-rate interest rate swaps in 2006 with JPMorgan Chase Bank on $325 million of debt. The starting date is in August.
Under the swap agreement, health care provider will pay the counterparty a fixed rate of 3.890% and receive a floating rate of 68% of the London Interbank Offered Rate. The fair value of the swap stood at negative $52 million at the end of March.
The swap does not include any collateral posting requirements. UCMC is currently negotiating a term of the original swap contract that required swap insurance be in place before the start date. Since that market has collapsed, the medical center is hoping to renegotiate the term. Though rates have risen, McColgan said UCMC’s “overall borrowing cost for the pavilion is still very attractive.”
Ahead of the issue, all three rating agencies affirmed the medical center’s low double-A ratings. UCMC will have $850 million of debt after the new issue with 52% in a fixed-rate mode, 38% in floating rate, and 10% in commercial paper.
The new bonds are secured by a pledge of the obligated group’s unrestricted receivables. The medical center is the only member of the obligated group.
“The affirmation of the Aa3 rating and maintenance of the stable outlook reflect UCMC’s continued good cash flow generation, maintenance of good liquidity ratios, and strong relationship with Aa1 rated University of Chicago,” Moody’s Investors Service wrote.
The hospital system is a nonprofit entity separate from the university, but they are closely linked and all members of the medical center’s governing board are appointed by the university board. UCMC serves as the principal teaching affiliate for the University of Chicago’s Pritzker School of Medicine. The credit further benefits from national recognition as a prominent academic medical center that provides a range of services.
UCMC saw about 22,700 admissions in fiscal 2010, generating $1.18 billion in operating revenues. After struggling in 2006, the system returned to profitability in 2007 and its balance sheet stabilized in 2009. After modest results in early 2009 as volumes slowed due to the economy, it closed out the year with an operating profit of $46 million. The medical center then recorded a stronger operating profit of $69 million in fiscal 2010.
The turnaround in 2009 was attributed to management efforts to counteract the recession’s impact by trimming $65 million in costs through various measures, including the implementation of supply-cost controls and cutting 600 positions.
Volume levels continued to decline in fiscal 2010, although some of the tapering off was anticipated due to the impact of UCMC’s Urban Health Initiative, which initially drew community protests. Under the program, the center redirects some patients from its emergency room to a network of community hospitals it has partnered with to provide more basic services.
Management projects continued improvements in its operating performance this year and through 2015 with expected cash-flow margins of between 11.5% and 12.5%. UCMC’s unrestricted cash and investments grew to $862 million in fiscal 2010 from $677 million a year earlier, covering 300 operating days.
Its challenges include an above-average debt burden at its rating level once the new bond issue is completed and competition from four other academic medical centers in the competitive Chicago region.
UCMC’s academic competitors include the University of Illinois Health Services, Northwestern Memorial Hospital, Loyola University Health System, and Rush University Medical Center. It also faces competition from two large health systems, Advocate Health Care and Resurrection Health Care.
Fitch Ratings said some of the competition is mitigated by medical center’s structure, and its services and reputation.
“Although UCMC operates in the highly fragmented and competitive greater Chicago metropolitan area, UCMC’s closed faculty staff, research platform, and high-acuity service focus draw patients from a broad geographic area, with some programs having a national and international reputation,” analysts wrote.
Other strains include a high exposure to Medicaid that accounted for 23% of gross revenues in fiscal 2010, whichhas fallen off from 27% in fiscal 2006. Also, nearly half of its employees are unionized, and it participates in the university’s defined-benefit pension plan which had only a 48% funded ratio.
Ahead of the new issue, Fitch also affirmed the university’s rating of AA-plus and Moody’s affirmed its rating of Aa1.