Officials at the New York City Health and Hospitals Corp. said Wednesday that they will sell $550 million of debt early next week after receiving investment-grade ratings from the three rating agencies.
"We feel good about the ratings," said Patrice I. Mitchell, the corporation's vice president for capital finance. "The goal was to get a rating independent from the city's."
The bond issue will be the first since the corporation gained fiscal independence from City Hall in September.
Hospital corporation officials say the offering and its investment-grade status was the remaining hurdle in establishing the city's vast public hospital system as an independent issuer of tax-exempt debt.
The $550 million issue, scheduled for sale on Tuesday, was announced after the corporation this week received ratings of BBB from Standard & Poor's Corp., Baa from Moody's Investors Service, and BBB from Fitch investors Service. The bonds will be general obligations of the corporation.
The bonds will be sold through a syndicate led by Dillon, Read & Co. as bookrunning senior manager and PaineWebber Inc. as co-senior manager. The management group will consist of 13 firms. Chemical Securities Inc. and Carmona Motley & Co. are serving as the corporation's financial advisers.
Marc Fasteau, a managing director at Dillon Read, said the corporation received a commitment from one bond insurance firm to insure part of the deal. He said no decision has been made on the use of insurance. "We won't know about until we proceed with the deal," he said.
Fasteau said details of the issue's structure are also not finalized. He said, however, that the transaction will provide level debt service for the corporation because of the mix of projects being financed and because the securities are not general obligations of the city.
As a result, the bonds do not have to comply with state law that requires issuers to pay more principal and interest during the early maturities of the issue. The transaction is tentatively structured to include 30-year revenue bonds.
Institutional investors said that yields on the securities could range about 10 basis points higher than the yields on New York City's outstanding GO bonds. The corporation's financial adviser, Chemical, agreed that the bonds could sell 10 basis points cheaper in yield than the city's.
The city is rated Baa 1 by Moody's and A-minus by Standard & Poor's. This week, the city sold $917 million of bonds, including about $496 million of fixed-rate, tax-exempt bonds priced with a maximum yield of 6.25%.
Probably No Derivatives
Fasteau said the corporation's offering probably will not contain derivative products. Although the sale is scheduled for Tuesday, that could change depending on market conditions.
"It always depends on the market," Fasteau said. "At this time, we don't anticipate a delay."
Statements provided by the three rating agencies said the investment-grade rating is an affirmation of the hospital corporation as a provider of essential services to the city, as well as an acknowledgment of the city's commitment to finance these services.
Despite the positive assessment by Mitchell, the corporation vice president, the ratings fell below the expectations expressed by corporation officials and underwriters in January after receiving a ruling from the federal government on the use of Medicaid and Medicare funds.
The ruling, obtained from the Health Care Financing Administration, allowed the corporation to establish a secured pool of revenues, including federal Medicare and Medicaid money, to pay debt service on its bonds. Federal Medicaid and Medicare subsidies account respectively for 67% and 12% of the corporation's revenues, officials say.
According to the plan, the corporation will initially place its Medicaid and Medicare payments in a separate financing subsidiary, which will pay debt service on the hospital bonds before other expenses are paid.
Corporation officials and underwriters said in January that this so-called lockbox approach for servicing the corporation's debt, when combined with other measures such as the city's commitment to fund all deficits run by the corporation, could earn the hospital corporation a rating equal to the city's. The rating agencies, however, provided different views of other aspects of the corporation's credit structure, including the lockbox arrangement for revenues.
While all three rating agencies acknowledged that the lockbox structure provided some short-term benefits to the credit, the structure was not enough to make the hospital corporation's bond rating equal to the city's in terms of credit quality.
One credit analyst, who spoke on the condition of anonymity, said the hospital corporation's credit suffers from a lack of diversification, because nearly 80% of its revenues come from the federal government.
"HHC handles some of the sickest people in the city and those with the least ability to pay," the analyst said. "And most of their revenues come from one place. There's not much diversification with this credit."
Diana Lee, a vice president at Moody's, termed the credit "a hybrid" because the city is not directly responsible for the corporation's debt service. She said the hospital corporation is not "fully self-sustaining," which means the rating is not based solely on the hospital corporation's ability to make debt service.
Lee said the city has "a statutory obligation" to finance operating deficits of the corporation. But she said the city has no "direct obligation" to cover the hospital corporation's debt-service payments.
Nancy B. Rubini, a director at the health-care financing group at Standard & Poor's, said the lockbox approach "adds a lot of near-term strength" to the hospital corporation's credit. She said, however, that the corporation's long-term rating depends more on its ability to service patients and to receive reimbursement revenues from the federal government. "And the market for servicing patients will be seeing more competition," she said.
Evolutionary Step
Still, officials and underwriters have billed the issue's investment-grade status as an important step in the corporation's evolution as an entity separate from the control of City Hall.
In September, the administration of Mayor David N. Dinkins announced that it had signed an agreement giving the hospital corporation more financial autonomy, including the authority to prepare its own budget and create its own capital plan, currently sized at $2.6 billion for the next 10 years.
The impetus behind the move to separate the hospital corporation from the city was largely twofold. The hospital corporation, which provides health care for city fire-fighters, police officers, and city residents who cannot afford private insurance, has been criticized for inadequate care and for lack of budget control, which has resulted in operating deficits financed by the city.
Under the new plan, the city will continue to fund the hospital corporation's deficits. But administration officials estimate that a more independent corporation would force efficiencies on the system, bolstering both patient services and the corporation's ability to balance its books.
Independence will also allow the hospital corporation, which provides about 24% of all city inpatient admissions, to gain greater control over its budget. The city has in the past raided corporation surpluses for budget balancing purposes.
According to the new arrangement, the city will budget its hospital corporation subsidy in the beginning of each fiscal year, and the corporation will be largely responsible for balancing its budget.
The city will pay off the corporation's deficit if it reaches a threshold level of around $12 million, said Edward Merrigan, an analyst at Fitch.
The corporation will now keep all surpluses in its budget, and not find itself subject to city cost-cutting measures during the course of the fiscal year.
"The intent is to make the HHC accountable," Merrigan said. "Each hospital administrator will be responsible for his or her own budget. The plan is to create incentives in that money won't be taken away from the administrators if they produce surpluses."
In addition, the hospital corporation's independence adds another layer of diversification to the city's general obligation credit. Although the corporation was created in 1970 with the statutory authority to sell debt, the city has in the past financed the lion's share of the hospital corporation's capital needs through its own capital budget.
Officials in the Dinkins administration and the administration of City Comptroller Elizabeth Holtzman say bond diversification is key to maintaining the size of the city's capital program.
New York City is the municipal market's largest issuer of debt, selling about $4 billion of new-money securities each year. As part of the diversification program, the city has sold variable-rate debt, mini-bonds, and a yen-denominated issue. City officials are also exploring the creation of bonding authorities with separate revenue streams for infrastructure and sanitation needs.
While next week's offering marks a new chapter in the hospital corporation's existence, it did float a bond issue in 1985, when it sold $68.5 million of revenue bonds. The transaction was rated Aaa by
Moody's, reflecting letters of credit from Morgan Guaranty Trust Co. and Mitsubishi Bank.
