CHICAGO — Aurora Health Care Inc. in Wisconsin enters the market as soon as Tuesday to refund $140 million of outstanding debt in a deal officials scaled down from $377 million due to rising long-term interest rates.

The Wisconsin Health and Educational Facilities Authority is serving as the system’s conduit issuer. Bank of America Merrill Lynch is the senior manager and Ponder & Co. is serving as adviser. Aurora had planned to sell $377 million of fixed-rate bonds and another $104 million of variable-rate bonds later in the week, but decided to trim the fixed-rate tranche amid rising rates.

“We will just do the shorter maturities and come back later this year or in 2011 to finish the fixed-rate refunding,” said Robert O’Keefe, Aurora’s vice president of treasury and finance.

The fixed-rate refunding is for traditional present-value savings so the rising long-term rates have cut into savings. The variable-rate bonds will restructure outstanding auction-rate securities. Most borrowers with auction-rate securities restructured their debt after the ARS market collapsed in early 2008 as they saw rates skyrocket.

Aurora fortuitously linked the maximum rate it would pay to double-A rated commercial paper, so the system has seen little increase. “Even though we are not paying higher rates we want to restructure from a risk-management perspective,” O’Keefe said.

Ahead of the sale, Fitch Ratings affirmed Aurora’s A rating and Moody’s Investors Service affirmed its A3 rating. The ratings apply to $1.47 billion of outstanding debt. Bank of America is providing a letter of credit for the floating-rate piece.

The system’s strengths include its 30% leading market share in a broad service area covering eastern Wisconsin, Moody’s wrote. The system’s 14 acute-care hospitals had 89,000 inpatient admissions and generated $4 billion in revenue last year.

About 80% of system revenues were generated by a sizeable base of 1,430 physicians. The system also benefits from a conservative investment strategy and managed care contracts that carry long terms and provide revenue stability. No new debt is planned through 2013. 

Challenges include modest cash levels that would cover operations for just 91 days, a large unfunded pension liability of $393 million, and inpatient declines recorded annually since 2006.

The system generated operating income of $66.5 million for the first nine months of fiscal 2010, down slightly from budgeted levels. Officials are discussing ways to cuts expenses and contain costs, O’Keefe said.

“Despite competition, we continue to believe Aurora Health Care’s leading market position in eastern Wisconsin will be maintained,” Moody’s wrote.

Aurora has expanded to capitalize on growing areas, this year opening a new 110-bed hospital in Waukesha County and a 107-bed facility in Grafton in Ozaukee County. Both are outside Milwaukee. Each added to Aurora’s debt levels and have strained its balance sheet, although long term they are expected to bolster the system’s fiscal position.

“As expected, profitability measures have softened in the year-to-date period as the corporation absorbs the start-up expense related to opening of the Grafton and Summit hospitals. However, over the longer term profitability measures are expected to continue to show gradual, consistent improvement,” Fitch wrote.

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