The Ohio-based Cleveland Clinic Health System plans to privately place bonds denominated in pound sterling for the equivalent of about $530 million to finance a new hospital in central London.
The London hospital will expand the nonprofit system's international footprint by adding to a portfolio that includes locations in the United Arab Emirates and Toronto.
Bond proceeds will be used to refinance an existing bridge loan of $375 million the clinic put in place when it purchased 33 Grosvenor Place in central London. The remaining proceeds will go to the cost of turning the building into a new hospital.
Steven Glass, Cleveland Clinic’s chief financial officer, said the debt will be placed with United Kingdom and U.S. investors. He is confident that the backing of Cleveland Clinic’s AA-level ratings will make the deal an enticing offer for both international and domestic buyers.
The notes will be issued under Cleveland Clinic UK holdings but will be guaranteed by the U.S. health system. Cleveland Clinic will provide an unconditional guarantee which calls for timely payment for the life of the notes. The private placement guarantee will be on equal standing to all of the obligated group's existing debt.
“We actually think this is going to be a very attractive sell in the market place,” Glass said in a telephone interview. “Cleveland Clinic is a AA-rated organization, so while we are issuing these notes under what is Cleveland Clinic UK holdings company that issuance is guaranteed by the Cleveland Clinic -- so that is going to be very attractive in the marketplace.”
Glass said that investors eyeing the U.K. bonds will see that the full weight of Cleveland Clinic stands behind the repayments of its bonds. “Those notes will be supported by Cleveland Clinic, so that’s our balance sheet of about $16 billion and annual revenues of right around $9 billion,” Glass said.
“Municipals could prove enticing for European investors hoping to get a little extra yield,” said Howard Cure, Director of Municipal Bond Research at Evercore Wealth Management, LLC. “Cleveland Clinic has an international reputation, so not as much of an explanation needed to investors not familiar with government operations.”
Pricing is anticipated to happen on July 30. Barclays, HSBC and JP Morgan are the senior managers.
Glass said the health system would be in London at the beginning of this week roadshowing the deal to U.K. investors and at the end of the week the plan is to be in the U.S. speaking to organizations that would be interested in buying pound sterling-denominated notes.
S&P Global Ratings assigned its AA rating to Cleveland Clinic UK, which is based on the U.S. system’s rating.
“The ratings reflect our view of Cleveland Clinic Health System's credit quality as it implements a strategic plan that will expand the system outside of its stronghold in northeast Ohio, help improve its knowledge base, and maintain operations at a very sound level,” S&P said.
In August 2017, S&P raised Cleveland Clinic’s rating from AA-minus.
Moody’s Investors Service last week affirmed the health system's Aa2 rating and stable outlook. The rating, said Moody’s, reflects the health system’s strength as an international brand, which will allow it to grow revenue outside of the constrained northeast Ohio market. “CCHS will maintain strong liquidity despite heavy capital spending as cashflow, debt and fundraising will provide adequate funding,” Moody’ said.
Glass said that the foundation has an incredible reputation as global brand with the work it has done in the three years since it opened Cleveland Clinic Abu Dhabi. The location, which is owned by the Mubadala Development Co. and managed by the clinic, now employs 5,000 people and treats 400,000 patients a year.
“That is what we are building upon with Cleveland Clinic London,” Glass said. “This is an international hospital; here in the U.S. our performance has been very good, which is reflective of our AA rating and we are entering into the London private hospital marketplace which is an attractive marketplace as well.”
The system intends to construct the private hospital in London on the property that it acquired in fiscal 2015.
Cleveland Clinic expects the 200-inpatient-bed facility near Buckingham Palace will open in early 2021. It will have a full imaging suite, a full neurological suite with rehabilitation, eight operating rooms, endoscopy and catheterization labs, day case rooms for surgery and will offer specialty services for general surgery, cardiology and neurology.
George Huang, a director in municipal securities research at Wells Fargo Securities said hospitals like Cleveland Clinic look to build internationally for brand extension and marketing purposes.
“In the last decade there has been more of international push from U.S. hospitals but it is still limited to top-tier, clinically renowned hospital, with global brand recognition,” Huang said.
Huang said that the international expansion gives hospitals the opportunity to diversify revenuethat acts as a type of feeder. In the seven years since the Affordable Care Act passed, there has been more of trend for tertiary or quaternary level hospitals – hospitals that offer high-level or cutting-edge services – to purchase community hospitals to be feeders, he said.
When they open international campuses, foreign patients can seek out those unique services the brand can offer.
Huang said that attracting foreign patients ultimately boosts a hospital's bottom line because they are private-pay.
“You don’t have any discounting on the services that you get with the insurer here domestically and that is really attractive for a hospital especially when you get an expensive, high-level need of service,” Huang said. “Usually these are wealthier patients that can afford the service.”
The Cleveland Clinic system has about $4 billion in bonds outstanding, including the $375 million bridge loan that will be restructured as part of the private placement. Glass anticipates that when the sterling notes are sold the system will be looking at roughly $400 million of additional debt. The clinic issued a $1 billion bond refunding in August 2017 that resulted in a significant savings and cleared the path for the foundation to issue additional debt for the new central London hospital.
Although the health system has no plans to issue additional debt this year, it is projecting continued high capital spending through fiscal 2023. It anticipates average capital expenditures of approximately $1 billion a year during this period. “With its very strong enterprise and financial profiles, we believe CCHS has and will consistently execute on its strategy and thereby support the rating in the next several years,” S&P said. “While CCHS is likely to issue more debt in the next five years, we don't expect to change the rating if CCHS achieves its overall forecast.”
The health system is also growing domestically. During fiscal 2018, Cleveland Clinic will have opened or is opening new sites, including a children's hospital in Cleveland and a new 230-bed tower for its facility in Weston, Florida.
The health system is interested in aligning with Martin Health System in Stuart, Florida, and Indian River Medical Center in Vero Beach, Florida.
“We are looking to expand in South Florida,” said Glass. “We have great name recognition in the Florida marketplace with what we have done over last several years.”
Glass said that the system has a letter of intent with Indian River Medical Center. “We are currently negotiation to a definitive agreement with them and if that is successful they will fold into the Cleveland Clinic Health System probably around Oct. 1,” Glass said.
The system is also negotiating with Martin Health System to have a definitive agreement with them within the same time frame.
Glass said that the system is also a finalist for Boca Regional Medical Center in Florida. Boca has narrowed it down to two prospective organizations that they would like to join.
“We are hoping they will make selection in the next month and hopeful it will be Cleveland Clinic,” said Glass. “With that we will be building a very large integrated delivery health system in South Florida and leveraging what we have been able to do.”
“If CCHS completes a deal with any of the Florida organizations it would bolster its strength in the market,” said S&P. Currently, CCHS reports it has only a 2% market share.
The system operates fourteen hospitals with approximately 4,000 staffed beds. Thirteen of the hospitals are in northeast Ohio, anchored by the main Cleveland Clinic campus.
It also operates 21 outpatient family health centers, 11 ambulatory surgery centers, as well as numerous physician offices throughout a seven-county area of northeast Ohio. It also operates health and wellness centers in West Palm Beach, Florida, and Toronto, Canada, and a specialized neurological clinical center in Las Vegas.
