Bonds

Indiana University Health heads into the market this week with a $726 million transaction to provide ongoing financing for the system’s new hospital campus under construction in downtown Indianapolis.

The bonds are selling through the Indiana Finance Authority in three tranches with a $325 million fixed-rate series, $300 million selling as put bonds with five-to-10 year mandatory tenders, and $100 million selling as floating rate notes with mandatory tenders between seven and 10 years — a structure designed to keep costs down now and maintain flexibility.

The system had planned for additional debt load, reserving capacity and structuring its current debt portfolio to accommodate it. All of its debt, with the exception of its line of credit, is fixed-rate as it took advantage of the years-long low rate environment so there’s now flexibility to put some debt in a floating-rate structure.

“We have the flexibility to use a diversified approach as we come to market to avoid placing all of our eggs in one basket” while also “staying within our established risk perimeters,” Matthew Burgoyne, assistant treasurer, said in a recorded presentation for investors.

“By strategic design all of these tender dates are expected after we complete the downtown Indianapolis hospital. The shorter portions will ensure that we have strategic flexibility to reposition to the capital structure that becomes most desirable in several years,” Burgoyne said.

Citigroup is the book-running senior manager and JPMorgan is the co-senior manager.

While the sector remains strained, hospital bonds rated in the double-A category offer “reasonable incremental spread over generic revenue bonds,” CreditSights said in its Muni New Issue Notes report authored by Patrick Luby, senior municipal strategist, and Sam Berzok, analyst.

Only 1% of $22 billion of hospital issuance since the start of 2022 has come from Indiana borrowers “so this presents an opportunity for investors to add geographic diversity, which could stimulate demand,” the report reads.

About $585 million of the sale will go to expand a suburban hospital campus in Fishers and the system’s new flagship Indianapolis hospital campus with 864 hospital in-patient and observation beds, a full-service outpatient center, a medical education building, and on-site faculty offices to enhance ongoing collaboration with the Indiana University School of Medicine.

The new hospital and academic campus — now under construction set to open in late 2027 —will consolidate services provided at two campuses which include some buildings that are 100 years old. The remainder of the issue will refinance a line of credit.

“We need a modern platform to deliver care,” Jennifer Alvey, chief financial officer, said in the investor recording.

“IU Health’s capital investment strategy is based on our need to meet the increasing demand for our services. Although there’s been much analysis and forecasting by consultants about the shift of service to outpatient settings — that is occurring — the reality is our hospitals are full,” Alvey said.

The capital plan carries a $2.3 billion construction cost with an additional $2 billion needed for additional infrastructure projects and operations. The new hospital campus also allows the system to set the stage for meeting long-term carbon neutrality goals.

With $8.1 billion of revenues last year, the system is the largest in the state. It operates 16 acute care hospitals, four of which are operated under a single license and is affiliated with the Indiana University School of Medicine, the largest medical school in the United States by student body.

While the system has struggled like most in the healthcare sector, first from COVID-19 impacts and then from labor, inflation, and supply chain strains, it recorded a 2.2% positive margin for the first quarter. Revenues are on rise reaching $8.1 billion in 2022 from $7.9 billion in 2021 and $7.1 billion in 2020.

Ahead of the sale, Moody’s Investors Service affirmed the system’s Aa2 rating and stable outlook and S&P Global Ratings affirmed its AA rating and stable outlook. After the issue, the system will have $2.2 billion of debt.

“The rating reflects IU Health’s status as the largest health system in Indiana, with 16 hospitals, a sizable medical group, and an extensive ambulatory presence, which has resulted in the system gaining the leading market share in the four competitive regions it covers,” said S&P analyst Marc Bertrand.

S&P anticipates the system’s balance sheet can absorb the new debt issuance and the system will successfully execute on its ambitious capital strategy over the next several years while improving operating performance.

The Aa2 rating “reflects Moody’s view that IU Health’s strong demand and cost control measures will drive a steady improvement in margins toward historical levels and very good liquidity to support a sizable increase in debt,” analysts wrote.

The most significant challenges remain elevated labor costs and execution risk related to a very large project underway to consolidate the downtown Indianapolis campuses. The system despite its top market share faces competition from other sizable health systems in the region. Moody’s expects margins to rise to around 8% this year.

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