BRADENTON, Fla. — The Inova Health System hopes to play on its strength as the largest nonprofit heath-care provider in northern Virginia next week when it sells $500 million of double-A rated bonds.
The offering, most of which is fixed-rate issuance, will generate around $400 million of new money for a number of projects, including a new patient tower, a women’s hospital, and a parking garage at the system’s flagship hospital, Inova Fairfax, and a new patient tower at Inova Mount Vernon.
A retail order period is planned for Tuesday morning, followed by institutional sales in the afternoon.
The bonds are being sold on behalf of Inova by the Fairfax Industrial Development Authority.
The transaction is structured in three series with $290 million of fixed-rate A bonds, $60 million of fixed-rate B bonds, and $145 million of variable-rate C bonds.
The A bonds will have serial and term maturities up to 30 years, while the B bonds will have 10-year serial maturities that may be refinanced in 2022.
Most of the C bonds will be a refunding, though $50 million will be new money, with the entire $145 million of variable-rate bonds based on the Securities Industry and Financial Markets Association’s index.
The variable-rate debt will be in Window mode, giving Inova the right to defer a tender of the bonds for up to seven months, if needed.
Such VRDBs remain eligible for money market funds, while allowing the health care system to offer self-liquidity and eliminate a standby bond purchase agreement supporting the refunding portion of the issue.
The bonds are secured by a general obligation pledge of the obligated group, which consists of the Inova Health System Foundation, Inova Loudon Hospital, Inova Health Care Services, Inova Health System Services and Inova Alexandria Hospital.
The offering should be well-received by investors, according to Inova chief financial officer Richard Magenheimer.
“It’s summertime, but we’re expecting a lot of interest in the bond sale,” he said. “Virginia is always an attractive state, and there’s always demand for highly rated bonds.”
The bonds are rated Aa2 by Moody’s Investors Service and AA-plus by Standard & Poor’s. The variable-rate bonds, which will be supported by Inova’s internal liquidity, are rated Aa2/P-1 by Moody’s and AA-plus/A-1-plus by S&P.
Both rating agencies said the outlook is stable, and affirmed their ratings on $1 billion of outstanding debt.
Analysts described the system’s financial health as strong, and supported by consistent management practices.
Inova has “a long track record” of addressing operating challenges, and using a consistently conservative approach to debt and investment management, which has translated into ample resources, according to Moody’s analyst Beth Wexler.
“Inova maintains sufficient daily liquidity for un-remarketed demand debt,” she added.
Moody’s stable outlook reflects the expectation that performance will continue to translate to an operating and debt profile that will meet or exceed benchmarks at the Aa2 rating level, Wexler said.
“While we believe Inova might find it difficult to sustain the current strong operating performance trends, in part due to general industry pressures and changes in payment models under health care reform, we believe it has positioned itself well from both market and financial perspectives, and exhibits superior credit attributes,” said S&P analyst Stephen Infranco.
The system has a five-year operating margin that has ranged from 6.7% to 9% in fiscal 2011, he said.
Favorable geographic demographics and population growth underpin Inova’s service area, which primarily covers Fairfax, Loudoun, Prince William and Arlington counties. The system has five full-service hospitals and separate outpatient facilities with 1,753 licensed beds, 12,800 employees and a 56% market share.
S&P said Inova’s balance sheet is characterized by low to moderate pro-forma leverage of 32%, and strong liquidity levels with 544 days’ cash on hand and 208% cash to pro forma debt as of May.
The system has a “very strong governance and management team, which has built a successful record of clinical excellence and strong financial operations, while keeping Inova well positioned as the leading regional provider,” Infranco said.
The credit strengths are partially offset by the roughly 35% increase of $400 million of long-term debt with the current issuance and a large five-year capital plan totaling $2.35 billion, he said.
Magenheimer acknowledged that the system is in a “sizeable recapitalization cycle.” Modernizing Inova Fairfax has been planned for more than five years, he said. Major projects at the flagship hospital were expected to be constructed concurrently beginning in 2009, but market conditions changed that plan.
“We decided from a risk perspective to do those projects in separate phases,” he said.
The patient tower, benefitting from some of next week’s bond proceeds, is scheduled to open in November, while it is expected that the women’s hospital will open in late 2014. The health care system is also updating patient information systems.
Though the health sector in general has suffered during the economic downturn, Magenheimer said Inova has tried to anticipate changes in the marketplace and regulatory environment.
“I like to think of ourselves as forward-looking, making adjustments ahead of time, and not having to react to unfavorable economic conditions,” he said.
S&P’s Infranco said Inova’s management has demonstrated a trend of strong financial and strategic planning, and continually delivers results in line with budgeted expectations.
He also noted that leadership has positioned the organization for the health care reform mandates of 2014 with the recent announcement of a partnership with Aetna Inc., which will develop “Innovation Health” to serve northern Virginia with managed-care plans.
Ponder & Co. is Inova’s financial advisor. Morgan Stanley is the book-runner on next week’s sale. Others in the syndicate are BB&T Capital Markets, Citi, Edward D. Jones & Co., Raymond James | Morgan Keegan and TD Securities LLC. Hawkins Delafield & Wood LLP is bond counsel. Polsinelli Shughart PC is underwriters’ counsel.
