Hospital Type: Acute Care
Location: Prestonsburg, Ky.
Project Objective: Expansion/Renovation
Financing Amount: $29.2 million
Source of Funding: A combination of taxable and tax-exempt variable-rate bonds enhanced by an “AA/A-1+” letter of credit

Background and Challenges
Highlands Regional Medical Center is located in a highly competitive region of eastern Kentucky. Its emergency department was too small for patient volume and needed to be expanded, and the hospital also wanted to increase its market’s access to outpatient services. As an additional strategic move, Highlands wanted to build three medical office buildings to gain greater physician alignment by offering ownership positions.

Financial Solution
Lancaster Pollard hit the ground running to meet Highlands Regional’s goal of closing on the bond issuance by the end of 2007, ensuring all needs and questions among the parties were addressed as quickly as possible.

Highlands typically spent about $3 million in cash annually on capital expenditures. It initially wanted to refund debt, expand its emergency department, and build three medical office buildings -- two satellite and one on campus. While the two satellite facilities were to be built in the near term, the timeline for construction of the on-campus MOB was undetermined. To take advantage of low-cost tax-exempt funding and eliminate the possibility of negative carry on the taxable portion of the bonds affiliated with the on-campus MOB, Lancaster Pollard recommended the hospital issue debt to fund the two satellite MOBs and the emergency department expansion, and use the remaining portion of the bonds to fund capital expenditures, thereby allowing the Highlands Regional Hospital District to retain the cash it would normally spend on the latter on its balance sheet.

Outcome
Because near-term capital expenditures will be funded with tax-exempt bonds, Highlands will be able to conserve cash on its balance sheet, which can later fund the on-campus medical office building. This simple shift of debt/cash usage lowered Highlands cost of capital over the life of the bonds due to the spread between taxable and tax-exempt rates. To further reduce the cost of capital, Lancaster Pollard structured the bonds to amortize the entire taxable portion prior to the amortization of the tax-exempt portion.