Bond Buyer Article

 

Minnesota's HealthEast Readies Debt Overhaul

 

By Caitlin Devitt and Yvette Shields  | June 9, 2015

 

CHICAGO - Minnesota's HealthEast Care System will make a rare appearance in the market this week with a debt restructuring aimed at strengthening its balance sheet.

The Twin Cities-area system will issue $150 million of BBB-minus rated tax-exempt, fixed-rate debt Thursday through the St. Paul Housing and Redevelopment Authority. It also plans simultaneously the direct placement of $131 million of taxable, variable-rate paper with three banks.

 

With the restructuring, HealthEast is "taking a very strategic view of the system's debt," said chief financial officer Doug Davenport, with the aim of improving its position.

 

JPMorgan is senior manager with Bank of America Merrill Lynch as co-manager. Hammond Hanlon Camp LLC is advising HealthEast and Dorsey & Whitney LLP is bond counsel.

 

The sales raises about $27 million for projects but the primary motive for the transaction is a refinancing of its existing debt from a 2005 bond issue and a loan from GE Capital.

 

As part of the restructuring, the system will also assume $34 million of St. Paul Port Authority bonds that it repays through a lease structure that puts the existing bonds at a speculative grade because they are rated one notch lower than the system's general rating.

 

No new net debt is being added to the system's balance sheet. HealthEast generated $943 million of revenues last year.

 

A total of $80 million of debt service savings is expected over the next eight years with maximum annual debt service dropping to $22.6 million from $37.4 million annually. The deal also paves the way to update the system's master trust indenture.

 

Without the new amortization of its debt service schedule, the system was facing the strain of a front-end loaded schedule that ramps up next year.

 

"We wanted to fix that," Davenport said.

 

The restructuring allows the system to address the spike and keep more cash reserves on the balance sheet to provide better protection for any unforeseen events and provide stability for the rating and the organization over the long term, said Davenport.

 

Both Fitch Ratings and Standard & Poor's assigned the publicly offered bonds the lowest investment level rating of BBB-minus, with stable outlooks.

 

Moody's Investors Service, which rates the system's 2005 bonds at a speculative grade with a positive outlook, was not asked to review the upcoming transaction. The system won back its investment grade level rating from Fitch in 2007 and from Standard & Poor's in 2012.

 

The bonds are secured by a gross receivables pledge and a mortgage on the system's primary hospital facilities. The deal is not expected to include a debt service reserve fund, which reflects an erosion in bondholder security from current levels, according to Fitch.

The system opted for a taxable structure on the directly placed debt to free itself of Internal Revenue Service rules on amortizing the debt, because the existing GE loan was already in a taxable structure and some of its 2005 bonds included previously advance-refunded paper.

 

The system liked the pricing on the direct placement.

 

"It was a pretty efficient way to access the market using a taxable and floating-rate structure," said Rich Bayman, a principal at Hammond Hanlon Camp.

 

Fitch said the system's debt load is manageable and through February was generating a three times coverage ratio of debt service, with future capital needs limited to about $25 million annually.

 

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Source: Becker's Hospital Review

http://www.beckershospitalreview.com/hospital-transactions-and-valuation/the-ultimate-transaction-guidebook-how-to-keep-your-hospital-from-singing-the-post-merger-blues.html