LOS ANGELS --- Standard & Poor's Corp. last week gave the thumbs-down to Santa Clara County, Calif.'s decision to nearly double its debt burden in order to finance expansion of a public hospital.

The credit agency lowered to A from A-plus its ratings On the county's roughly $133 million of outstanding lease-backed obligations.

"The downgrade reflects the large increase in long-term obligations" mandated by the county's decision to issue about $260 million of lease revenue bonds to expand Santa Clara Valley Medical Center, a Standard & Poor's press release said.

The rating change affects $128.9 million of various series of Santa Clara County Public Facilities Corp. certificates of participation, and $3.75 million of Santa Clara County Building Authority bonds, series 1971.

County officials "were disappointed at the downgrading," William Parsons, county finance director, said last Thursday.

While agreeing with Standard & Poor's conclusion that the hospital financing will spur "a significant increase" in the county's debt burden, Parsons said "the county remains one of the strongest credits in California."

Santa Clara County has no outstanding general obligation debt, and overall net debt remains low at $900 per capita and 1.2% of assessed property values.

County supervisors voted 4 to 1 in September to proceed with the lease revenue bond offering for the hospital expansion.

The deal was split into two separate transactions -- a fixed-rate component totaling $207 million that was sold last Wednesday, and a variable-rate component tentatively sized at between $50 million and $55 million scheduled for pricing Dec. 14.

The issuing agency for both transactions is the Santa Clara County Finance Authority, which is controlled by the supervisors.

Proceeds from both series of bonds will be used to finance a new 153-bed tower focused on surgery and radiology services, a parking garage, and several smaller facilities. As part of the project, an existing wing of the hospital that is seismically unsafe and technologically inadequate will he replaced.

Critics of the medical center expansion said the financing is not necessary because less than half of area hospital beds are full, but Parsons said the Valley Medical Center "is at a much higher occupancy rate of about 70%."

"We provide services such as head trauma and neonatal care, as well as many other services that are not done by other hospitals in this community," Parsons said. The hospital cares for the indigent and uninsured population.

Morgan, Stanley & Co. is the senior managing underwriter on both the fixed- and variable-rate portions of the hospital financing.

In what Parsons described as "a very difficult market," last week's fixed-rate offering contained serial bonds priced to yield from 5.70% in 1999 to 6.90% in 2011. A 2020 term, containing $74 million, was priced to yield 7.13%.

The fixed-rate bonds were rated triple-A because of credit enhancement provided by AMBAC Indemnity Corp. Before the insurance policy was obtained, the bonds were rated A by Standard & Poor's andA1 by Moody's Investors Service. Both rating agencies said their ratings are provisional until construction of the medical facilities is completed in July 1988.

The upcoming variable-rate issuance should provide the county with lower costs of borrowing than the fixed-rate bonds, Parsons said, "unless interest rates go up very., dramatically.

"Obviously, we're taking some risks with those variable-rate bonds if the interest rates should go up three or four points -- then we could actually regret it," he added.

Annual lease rental payments for the completed project will be about $19 million, Standard & Poor's said. The county is eligible to apply to state and federal officials for annual reimbursements that would cover about half of the payments.

In "a show of county management's support for the project," officials have guaranteed that the state has a right to intercept the county's share of motor vehicle license fees to pay debt service payments if necessary, Standard & Poor's said.

Revenues from the license fees would provide 2.5 times coverage of projected maximum annual debt service on the medical center bonds as well as on the county's outstanding COPs, the agency added.

A Moody's report on its Santa Clara County rating assignment said there are uncertainties "associated with future delivery of health care.

"Expansion of managed care and other developments in health care delivery could reduce the medical center's revenue base and could increase dependence on county subsidies," Moody's said. "If so, this could increase the additional burden on the county's general fund and reduce the operating flexibility which it currently enjoys."

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