Children’s Minnesota
Nonprofit health system Children’s Minnesota will refinance some debt and take out new debt to fund an electronic records transition, renovations at three hospitals and the purchase of medical equipment.
The city of Minneapolis and the Housing and Redevelopment Authority of St. Paul will issue $181.385 million of bonds on behalf of Children’s pursuant to a loan agreement dated Feb. 1.
The Series 2025 health care system revenue bonds are rated AA by Fitch Ratings and AA-minus by S&P Global Ratings. Both agencies give the debt a stable outlook.
The issuance will refund privately placed tax-exempt health care facilities variable rate revenue refunding bonds, Series 2020A.
The negotiated sale will price on Wednesday, with JP Morgan and Piper Sandler serving as lead managers and Dorsey & Whitney as bond counsel.
The health system, which generated $1.12 billion in revenue as of fiscal 2023, had unrestricted cash and investments of $1.16 billion by the third quarter of 2024.
There is no debt service reserve fund for the 2025 bonds. Principal and interest is payable from and secured by payments made by Children’s under the loan agreement and by Children’s and obligated group members under the Series 2025A tax-exempt note, issued under the master indenture between Children’s and U.S. Bank Trust Co., NA, according to the
The bonds are not secured by or payable from any taxes, revenues or assets of the issuer except the issuer’s interest in the loan agreement and the Series 2025A tax-exempt note and amounts held pursuant to the bond indenture.
“With [new EHR provider] Epic, the health system should expect benefits from standardization and improved workflows in operating units and in revenue cycle, resulting in improved collections translating to improved operating margins,” Fitch Director Madeline Tretout told The Bond Buyer. “The hospital also views Epic as a benefit in terms of physician recruitment.”
The health system’s EBITDA margins should reach 7% by fiscal 2027, Fitch said, and its cash flow will be enough to maintain healthy net leverage metrics. Children’s is the dominant pediatric healthcare provider in the Minneapolis metropolitan region, with about 65% market share in its seven-county service area.
“Operating efficiency measures implemented in FY23 including temporary labor spend were largely effective, bringing total quarterly temporary labor spend from a height of about $16.5 million in 3Q22 to a normalized level of about $2.5 million in 3Q24 and 4Q24,” Tretout said. “There were, however, factors that offset some of these improvements.”
Fitch noted Children’s ended fiscal 2023 with an operating margin of negative 2.5% and operating EBITDA margin of 2.8%, which it said reflected ongoing wage and labor pressure, an increase in governmental payors and industry-wide inflationary pressure.
S&P credit director Marc Bertrand
S&P also pointed to reduced operating losses through the Sept. 30 interim period, driven by respectable volume growth and a significant reduction in expenses related to temporary staffing.
Bertrand told The Bond Buyer Children’s has recently benefited from solid inpatient admissions and robust outpatient volumes. Children’s also implemented a push to bolster recruitment and retain current employees to offset temporary staffing expenses. The health system also benefited from an industry-wide decline in wages for agency nurses.
Children’s has maintained its leading position through it size and clinical footprint, programmatic investments and ongoing investments in infrastructure, among other things, Bertrand said.
“Children’s debt profile continues to benefit from low leverage and debt burden,” Bertrand said. “While we expect Children’s leverage and unrestricted reserves to long-term debt to weaken as a result of the new debt issuance, we believe that they will remain appropriate for the rating.”
S&P said it expects Children’s will generate positive operating margins through the outlook period; maximum annual debt service coverage will improve; and the health system’s enterprise profile will remain solid.
In connection with the issuance of the bonds, Children’s is trying to amend some provisions of the master indenture. The proposed amendments include the addition of a definition of force majeure and several amendments to the default and remedies provisions.
A spokesperson for Children’s referred questions about the bonds to the POS.