CHICAGO — The Wisconsin Health and Educational Facilities Authority yesterday approved the Children’s Hospital and Health System of Wisconsin Inc.’s $150 million auction-rate issue planned for later this week to raise funds for a new 12-story patient tower now under construction.
Goldman Sachs & Co. is underwriter, Kaufman, Hall & Associates Inc. is financial adviser, and Quarles & Brady LLP is bond counsel. Ambac Assurance Corp. will provide triple-A coverage for the issue, which includes about $100 million of new money. The remainder will refund debt sold in 1998, with between 5% and 6% of present-value savings expected.
The hospital system enters the market with its credit now firmly in the low double-A category, after receiving an upgrade late last week from Standard & Poor’s to AA-minus from A-plus. Moody’s Investors Service affirmed its Aa3 rating on the hospital’s new sale and on $185 million of outstanding debt.
Standard & Poor’s attributed the upgrade to the hospital’s strong operating performance, growth in its market share and unrestricted cash levels and the expectation that its balance sheet will remain strong despite an increasing debt load.
“We expect that the system will continue to generate operating performance similar to recent years’ levels given the geographic expansion and continued investment in physicians,” Standard & Poor’s analyst Suzie Desai wrote.
The hospital system entered into three 30-year swaps that convert the debt to a synthetic fixed rate with counterparty Goldman Sachs Capital Markets LP. Under the swap contracts, Children’s will receive a variable payment based on 68% of the one-month London Interbank Offered Rate from Goldman, while paying fixed amounts of 3.548% on $50 million and 3.568% on $100 million.
“At the Aa3 rating level, we are comfortable with the level and terms of the swap and variable-rate exposure” of 14% of the hospital’s portfolio, Moody’s wrote.The well-known and respected hospital is the state’s only free-standing children’s facility and Level 1 pediatric trauma center, and is one of three facilities that along with Froedtert Hospital and the Medical College of Wisconsin make up the Milwaukee Regional Medical Center campus, said WHEFA executive director Lawrence Nines.
Proceeds of the new-money sale will provide ongoing financing for the hospital’s tower expansion that will boost its bed capacity to 294 from 236, according to chief financial officer Timothy Birkenstock. The full $160 million cost of the expansion project is being funded with debt proceeds, cash, and philanthropic support.
The hospital’s credit strengths include strong cash flow that’s aided by its ability to draw patients statewide. Total revenue for fiscal 2006 was about $470 million with more than 14,000 admissions. The hospital’s unrestricted investments grew to $414 million last year. The hospital’s financial performance provided more than a 5 times coverage ratio of maximum annual debt service in fiscal 2006 and based on preliminary 2007 figures despite a significant increase in capital spending.
Its challenges include a relatively concentrated payer mix with 38% of revenues dependent on the state’s Medicaid program, a significant 56% increase in its debt load following the upcoming sale, and the demand for additional capital spending to meet demand.
The hospital is launching its first fund-raising campaign for bricks and mortar in two decades in hopes of raising $50 million for the tower expansion. The hospital is considering additional expansion projects including another tower, an ambulatory building, and a research facility. “We are working on the next phases of our eight-year plan and looking at the timing and how to finance it,” Birkenstock said.
