DALLAS -- Cook Children's Medical Center, the dominant provider of children's healthcare in Fort Worth and Tarrant County, Texas, will raise $175 million for a new tower in a negotiated bond deal set to price Wednesday.
The 30-year, fixed-rate bonds will be issued through the Tarrant County Cultural and Education Facilities Finance Corp., a conduit issuer serving nonprofits in Texas.
With this deal, the Cook system will have $458 million of debt outstanding, according to Moody's Investors Service.
Cory Rhoades, interim chief financial officer for Cook, said he expects the bond offering to be well subscribed.
"As we've looked at recent tax-exempt issues in the healthcare space, we're seeing strong demand for the highly rated credits," Rhoades said.
Standard & Poor's rates the bonds AA, while Moody's rates them Aa2. Outlooks are stable.
"The 'AA' ratings reflect our view of Cook Children's excellent market position, growth, and very robust operating and balance sheet metrics, including cash flow that is adequate to generate above 10x pro forma maximum annual debt service coverage based on fiscal 2013 results," said Standard & Poor's credit analyst Karl Propst.
Suzanne Beitel, executive director of public finance for healthcare at JP Morgan, is lead banker on the deal. Goldman Sachs and Raymond James are co-managers.
First Southwest Co. senior vice president Chris Janning and managing director Laura Alexander are financial advisors.
Jonathan Leatherberry with Bracewell & Giuliani serves as bond counsel.
With discounts on the term bonds, Children's expects to net about $166 million from the deal after finance costs, Rhoades said. That should cover about half of the costs of the South Tower project underway at the Fort Worth campus.
The $349 million project will add 314,000 square feet to the campus and provide space for surgery services, a new heart center, a laboratory and sterile processing center.
Pediatric surgeons at Cook Children's performed more than 27,000 procedures last year.
The modernization project will provide specialized equipment to improve efficiency, officials said.
In addition to the South Tower, a new, permanent Urgent Care Center will be built to reduce the wait times in the emergency department.
"Simply renovating the old spaces wouldn't give us what we so desperately need to service our patients and their families," said Cook president Nancy Cychol. "The interstitial space between floors is too small and we can't move the latest technology we need into those areas such as surgery and the emergency department. We also need a better layout and flow in the emergency department so we can treat patients more efficiently."
The South Tower project comes five years after the medical center broke ground on a $250 million expansion that ranked as the largest in Cook's history.
At the time, Cook Children's was at capacity in key areas including the neonatal intensive care, which needed to grow from 55 beds to 117.
Cook Children's is the dominant provider of pediatric services in Tarrant County with about 85% market share for pediatric admissions. The medical center saw inpatient admissions grow by 10% in fiscal year 2013.
Once known as Cook Children's Hospital, the medical center's roots go back to Jan. 29, 1929, when the W. I. Cook Memorial Hospital opened in Fort Worth. Namesake Missouri Matilda Nail Cook dedicated the oil royalties from the Cook Ranch near Albany, Texas, to build and sustain the hospital.
When the polio epidemic was spreading in the United States in 1952, the trustees of the hospital voted to expand the facility to 72 beds and changed its mission to care exclusively for children.
Today, Cook Children's has an integrated delivery system made up of a health plan, employed physician network, home health agency and philanthropic foundation.
Cook reported an operating margin of 15.9% with $191.8 million in operating income in the last fiscal year, with $257.4 million in operating cash flow representing a 21.4% margin.
"This continues a multi-year trend of double digit operating cash flow margins, averaging over 20% for the past three fiscal years," noted Moody's analyst Sarah A. Vennekotter. "With a modest debt load, the high cash flow generation resulted in a very strong Moody's-adjusted maximum annual debt service coverage of 18 times in FY 2013."
Patient care revenue was driven by volume, with a 10% growth in admissions, a 1% increase in emergency room visits, a 10% increase in urgent care visits, and a 12% increase in outpatient clinic visits, according to Moody's.
"The payer mix is strongly weighted towards Medicaid, which constitutes 53% of gross revenues, and the Health Plan is subject to capitation risk under the Texas STAR (State of Texas Access Reform) and CHIP (Children's Health Insurance Program) programs, resulting in vulnerability to future changes in Medicaid funding," Vennekotter said.
Cook Children's Health Plan, which was formed to serve the growing CHIP and Medicaid managed care populations, covers more than 113,000 members. The coverage was a key element in allowing Cook to dominate its market, Vennekotter said.
"However, we note that increasing competition from Children's Medical Center of Dallas is present, as this provider also recently opened a specialty care clinic in Southlake, within CCMC's service area," she added.
Texas Gov. Rick Perry's decision to withhold Medicaid from the working poor should not have any direct impact on Children's, Rhoades said. The programs that cover children are not directly impacted by the federal Affordable Care Act or the health insurance exchanges. Perry rejected a state insurance exchange for private health benefits, even though the state has the highest percentage of uninsured residents.
Cook's preliminary official statement on this deal concedes that the hospital cannot predict what impact the changes in healthcare law will have.
"I certainly view the future very carefully," Rhoades said. "There are opportunities for an organization such as ours to thrive under an ACA environment. I think our biggest concern is that Medicaid is sufficiently funded."
