CHICAGO -The Wisconsin Health and Educational Facilities Authority will enter the market this month on behalf of two hospitals - Gundersen Lutheran and Meriter Health Services - with deals tied to the restructuring of auction-rate securities and insured variable-rate bonds.

Both Meriter and Gundersen received upgrades by rating agencies reviewing the upcoming sales, which were approved by the WHEFA board on Monday.

Gundersen, located in LaCrosse, will borrow nearly $90 million of variable-rate demand revenue bonds to pay off a short-term line of credit the hospital tapped to retire its 2006 variable-rate issue. That issue carried insurance from Financial Guaranty Insurance Co. and rates shot up following the insurer's loss of its triple-A rating amid the looming threat that the bonds could lose their liquidity backing. Wells Fargo Bank NA will provide a letter of credit on the issue and is the remarketing agent.

The hospital also will convert another $78 million of auction-rate securities originally issued in 2003 to variable-rate demand bonds. Dexia Credit Local is providing a liquidity facility on the converted debt, and Gundersen will leave in place insurance coverage from the still top-rated Financial Security Assurance. Merrill Lynch & Co. is the remarketing agent.

Kaufman Hall & Associates Inc. is the hospital's financial adviser on the transactions, which will come to market in either late May or early June, a banker on the deal said.

Gundersen officials will leave intact synthetic fixed-rate swaps tied to the original 2003 and 2006 debt. The hospital pays between 3.26% and 3.79% and receives 67% of the London Interbank Offered Rate. Although the counterparty payments may not be sufficient to fully cover the interest costs, the current termination fee would amount to $11.7 million.

Fitch Ratings affirmed Gundersen's A-plus credit on $174 million of rated debt, but revised its outlook to positive from stable. Moody's Investors Service upgraded the credit to A1 from A2. Standard & Poor's rates the system A-plus.

The Moody's upgrade reflects "the organization's elevated cash flow generation in recent years and continued strengthening of liquidity." The hospital's strengths include its relationship with a large physician clinic network; a leading market share in western Wisconsin, southeastern Minnesota, and northeastern Iowa; and steady balance sheet improvements with liquidity levels up to 236 days cash on hand in fiscal 2007.

Its challenges include floating-rate exposure on 90% of its debt, a decline in inpatient admissions in recent years, market competition, and tentative plans to increase its debt load by $75 million to $100 million over the next two years. The Gundersen system includes a 325-bed hospital, a 431-physician clinic, 21 branch clinics, and a health plan that combined generated revenue of $701 million in 2007.

Madison-based Meriter will restructure in the coming weeks $90 million of auction-rate bonds sold in 2006, converting to a variable-rate demand structure with a letter of credit provided by U.S. Bank. Piper Jaffray & Co. is the underwriter.

Standard & Poor's upgraded the system to A-plus with a stable outlook from A as part of its review. Analysts attributed the upgrade to "steady growth in overall business volume over the past several years, strengthening of its financial profile, and cementing of its solid market position in the three-hospital service area."

The system benefits from a relationship with the University of Wisconsin Hospital and Clinics and the University of Wisconsin School of Medicine and Public Health. The system's recent sale of Meriter Retirement Services also was viewed favorably, as that group historically broke even or operated at a slight loss. The system's challenges include an operational liquidity level that is low for its rating category and a high level of capital spending planned over the next two years.

"The stable outlook reflects our expectation that MHS will sustain the improved levels of financial performance to support its capital investments and to maintain its market position in the competitive Madison area," wrote analyst Suzie Desai.

Moody's rates the system A1.


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