Yields lured buyers to MetroHealth bond sale
CHICAGO – Cleveland-based MetroHealth System’s $946 million sale last week drew $4.3 billion in orders, allowing underwriters to pare down the system’s yield penalties.
The initial pricing drew $4.3 billion in orders from 122 funds, banks, firms and individuals with the final true interest cost on the 40-year bonds landing at 4.997%, according to MetroHealth, the public hospital system operated by Cuyahoga County.
The system saw its ratings fall three notches to the lowest investment grade ratings because of the addition to its debt load to fund its sweeping campus transformation plans.
The deal’s 10-year maturity landed at 3.70% for a spread of 155 basis points to the Municipal Market Data’s benchmark, according to MMD. The system paid a penalty compared to other BBB credits with the spread on the 10-year more than 60 basis points over the BBB rate.
Traders were watching the pricing to gauge investor interest in healthcare credits amid the renewed threat to the Affordable Care Act due to the House’s passage of a replacement bill. MetroHealth has a high level of Medicaid payors so threats to the ACA’s Medicaid expansion put it at some risk.
Several market participants said the deal priced in line with expectations. One trader said the sale’s timing was helped by Senate Republicans’ comments that they plan to overhaul the House bill, with strong demand for high-yielding paper driving broad interest.
“The healthcare sector had taken a pause of sorts earlier in the year as a result of the talk of ACA repeal, but we see recent flows that healthcare credits are finding more interest now that it's somewhat clear that a major healthcare overhaul in DC is halted,” said Lynne Funk Posner, a partner at Court Street Group Research. “Given its ratings and massive size, those spreads were likely appropriate.”
The system said it was pleased with the results and officials believe their investor outreach explaining the system’s transformation plans helped.
“During comprehensive investor presentations in Boston, Philadelphia, Princeton and New York, we noted wide interest in the transformation project and what it represents to the community. As the largest public construction project in Cuyahoga County, and one of the largest in the nation, the benefits to economic development of Cleveland and Cuyahoga County are substantial,” chief financial officer Craig Richmond said in a statement.
Bank of America Merrill Lynch and JP Morgan were co-senior managers with Kaufman, Hall & Associates advising the system.