Hospital Type: Critical Access
Location: Ishpeming, Mich.
Project Objective: Replacement hospital and medical office building
Financing Amount: $35.9 million
Source of Funding: Tax-exempt bonds enhanced by a bank letter of credit. Two swaps fix $24.7 million of the bonds at a blended rate of 3.52 percent for 10 years.
Other Factors: Refinance HELP loans. Charitable contributions provide additional funding.
Background and Challenges
Bell Memorial Hospital has provided health care since 1872; the oldest part of its facility dates to 1917. The organization includes a 25-bed Critical Access Hospital, outpatient facilities and assisted living. Bell was not designed for modern technology and had an average daily census of 14 in a building designed for 140. It needed to wring out the inefficiencies of an oversized and underequipped facility but was not a candidate for renovation.
Financial Solution
Bell’s margins were consistent with “BBB+” rated health care providers when compared to 2006 S&P medians for stand-alone hospitals. Lancaster Pollard structured a multi-piece financing that refinances outstanding loans and provides $33.8 million in new money at very low all-in interest rates. Both sides of the hospital’s balance sheet were considered to remove the possibility of technical defaults on existing debt covenants.
Lancaster Pollard negotiated for a bank to provide both an “AA-/A-1+” letter of credit for $32.2 million in tax-exempt, variable-rate bonds and a $21 million assignable swap. Recognizing this structure would conflict with existing debt covenants, Lancaster Pollard also refinanced $2.2 million in HELP loans and provided $1.5 million in additional construction funds with another bond issuance. A $3.7 million swap on this second transaction, combined with the first swap, fixes 75 percent of Bell’s debt at a blended interest rate of 3.52 percent.
Outcome
The new facility will include a 25-bed critical access hospital with private rooms and a new clinic with physician office space. Improved surgical areas are anticipated to aid in specialist recruitment and retention. The laboratory will allow Bell to employ state-of-the-art diagnostic equipment and provide space to accommodate the volume created by this increasingly essential care component. Patient access will be improved with the proper sizing and new location of the facility, and operational inefficiencies will be reduced.
