The Massachusetts Health and Educational Facilities Authority is scheduled to sell $232 million of revenue bonds today to finance the expansion and upgrade of Boston's Beth Israel Hospital.
The size of the deal and the complexity of its structure have necessitated the use of bond insurance, despite the insurer's AA rating from Moody's Investor's Service and A1 rating from Standard & Poor's Corp., according to Goldman, Sachs & Co., the deal's senior manager.
Authority officials said the offering mirrors a nationwide trend as many hospitals struggle to fund new facilities necessitated by improved medical technology.
Edward M. Murphy, executive director of the authority, said the bonds will be used for three purposes: the construction of a new ambulatory care and surgery clinic, the expansion of research facilities, and the improvement of existing equipment.
"Most of the proceeds will be used for an improved facility that the hospital can use for outpatient care," Mr. Murphy said. "Improvements in technology have dramatically increased the need for a larger facility providing same-day surgery."
As an example, Mr. Murphy said that a cataract or retina procedure that used to call for a four- or five-day stay in a hospital can now be completed in a few hours.
The new facility is expected to cost around $140 million and will comprise 12 floors and a below-ground parking area. According to the preliminary official statement for the deal, the building will be constructed on a 2.3-acre lot adjacent to the hospital.
Another portion of the loan will be used to purchase the former Red Cross Building on Brookline Avenue, near Fenway Park. Mr. Murphy said this building should cost about $24 million to buy and renovate.
"This building will be the hospital's research base," he said. "With biotechnology growing so rapidly, it is integral that Beth Israel have comparable facilities with the other large teaching hospitals."
The last portion of the loan, $25 million, will be used for upgrade, maintenance, and improvements to existing hospital equipment.
"Many hospitals are faced with retrofitting their facilities from inpatient to outpatient facilities," Mr. Murphy said. "We're not adding many new beds through this project. Instead, the hospital is focusing on catching up to the available technology."
Beth Israel, one of the major teaching hospitals for Harvard Medical School, specializes in all facets of medical service for the Boston area. According to the preliminary official statement, the bonds will be supported by an increasing stream of revenues into the hospital.
In the first nine of 12 periods of fiscal 1992, running from July 1, 1991, through June 30, 1992, revenues have risen from $721,000 in 1991 to $2.17 million in 1992 -- an increase of 242% -- according to the statement. From 1987 through 1991, revenues increased 52.9%.
According to Mr. Murphy, Goldman Sachs, has structured a "very attractive financing."
Although the authority has a strong rating from Moody's and Standard & Poor's, the offering will be insured by AMBAC Indemnity Corp., which will make the bonds AAA rated.
"The standard line on issuing floaters, is that you either need a AA rating from both houses or insurance," said Benjamin S. Wolfe, a vice president with Goldman Sachs. "We therefore decided to insure the entire deal."
"We very rarely get a chance to insure such strong credit," said Eleanor L. Matthews, vice president at AMBAC. "After an extensive site tour, we decided to negotiate for the right to insure these bonds."
According to Ms. Matthews, this is the largest single health-care facility issue AMBAC has ever insured.
"It's an excellent credit," she added.
Murphy said the insurance, and the rating that goes with it, is necessary because of the size of the deal and its many sections.
The loan will include $50 million of fixed-rate, Series G-1 bonds. This portion of the financing will contain serial bonds maturing from 1996 through 2004. There will also be a term bond maturing in 2012 containing $32 million.
"A term bond with insurance in the current market will probably yield between 6.15% and 6.10% in 2012," a market participant said. "That's a pretty conservative estimate though. It could be lower."
The second portion of the loan consists of $65 million of Series G-2 periodic auction reset securities, or Pars.
These bonds will be scheduled to mature in 2025. The yield on the securities will be set very fifth Friday through an auction.
"We are issuing these securities to entice investors at the lower end of the yield curve, who find them to be a very attractive investment; to further diversify the pool of investors; and to allow for the possibility that the bonds could be called earlier," Mr. Murphy said.
"The hospital was interested in increasing the amount of variable-rate debt it was supporting," said Mr. Wolfe. "Plus, it is also easier for us to market the loan when it's spread out in different sections."
He added that because of the ongoing and successful fund-raising efforts of the hospital, it may be possible to redeem a substantial portion of the loan early.
There is a mandatory redemption of at least $2.1 million of the Pars beginning on July 1, 1996, with the same amount scheduled to be called every year on that date, according to Mr. Wolfe.
The remaining portion of the loan is made up of another section of Pars totaling $58.7 million and a corresponding section of $58.7 million inverse floating-rate securities, or Inflos.
The yield on these securities will also be reset every fifth Friday. When the bonds are sold, one fixed rate will be decided for both the Pars and the inverse floaters.
If the rate of the Pars goes up at the periodic auctions, then the rate of the inflos goes down, and vice versa.
Mr. Murphy said that the structure of the loan should increase investor response.
"With so many investors willing to invest in the expansion of teaching hospitals and Beth Israel's excellent reputation for sustained growth, we are encouraged about the prospects for the deal's success," he said. "This is one of those occasions when there is something for everyone."
