Upgrade bolsters Detroit’s Henry Ford Health ahead of deal

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Detroit-based Henry Ford Health System heads into the market next week with a $250 million sale bolstered by a one-notch upgrade from Moody’s Investors Service as it proceeds with nearly $2 billion in expansion and upgrade projects.

The tax-exempt, fixed-rate hospital revenue bonds are expected to price April 25 via the Michigan Finance Authority. Goldman Sachs and JPMorgan are lead managers. Ponder & Co. is the municipal advisor and Miller, Canfield, Paddock and Stone PLC is bond counsel.

Henry Ford is one of the largest healthcare systems in southeast Michigan.

Moody’s upgraded Henry Ford's rating to A2 from A3 ahead citing stronger financial performance. The upgrade comes as the system is undertaking a $1.95 billion five-year capital plan funded by cash, debt, philanthropy, and reserves.

“The system will continue generating stronger margins and cash flow over at least the next year, driven by increased operating efficiencies and growth strategies for key service lines in the provider division, and growth in the insurance division following a period of retrenchment in which it exited unprofitable contracts,” Moody’s said.

At the higher rating level, the outlook is stable. It had previously been positive.

“It will take several years to materially improve liquidity,” Moody’s said. “We expect that if cash flow margin targets are not achieved, the organization will limit spending on some projects, but that overall spending will still remain elevated.”

S&P Global Ratings affirmed its A rating on the bonds, which carry a stable outlook. The rating agency, which upgraded the system in 2016, said the level of spending the system has planned will require it to sustain healthy operations and sound cash flow over the next few years to preserve its current bond rating.

“A higher rating is precluded at this time by the system's ambitious multi-year capital strategy,” S&P said.

Proceeds will be used to reimburse the system for $130 million of capital projects already underway and to fund other capital projects across the system's facilities.

The largest of these projects is the Brigitte Harris Cancer Center, which will be located across from Henry Ford's flagship hospital in Detroit. The project is designed to consolidate cancer services in a single facility to improve clinical quality and patient experience.

The new cancer center is sized at approximately 187,000 square feet and will include physician offices, treatment facilities, on-site lab and pharmacy services, and indoor and outdoor lounge space for patients and families. The total project budget is approximately $150 million, funded through a mix of bond proceeds, philanthropy, and cash flow.

The bonds will also reimburse the system for the Allegiance Health Patient Tower, a three-story addition built on top of an existing four-story tower at the health facility in Jackson, about 80 miles west of Detroit. The tower added 66 new private patient rooms to the facility, with a total budget of $45 million, and was completed in September 2018.

Bond proceeds will also fund the redesign of seven surgery labs at Henry Ford Macomb Hospital.

The system has several large projects in development, including two large outpatient medical pavilions in the Detroit suburbs, and the Henry Ford Detroit Pistons Performance Center. The Performance Center, a collaboration with the Detroit Pistons basketball team, will include comprehensive sports medicine and rehabilitation services. This project includes the $28 million Center for Athletic Medicine, a medical office building located adjacent to the Performance Center also funded by the series 2019 bonds.

For the fiscal 2018 the system reported roughly $6 billion in revenues and nearly $1 billion in debt outstanding.

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Not-for-profit healthcare Revenue bonds Primary bond market Ratings Michigan Finance Authority Michigan