The Milwaukee Regional Medical Center’s Utility and Infrastructure arm is teeing up a $61.8 million sale for projects at its Wauwatosa campus that houses a consortium of medical providers.
MRMC is a not-for-profit consortium that operates the campus which opened in 1967 about 5 miles west of downtown Milwaukee. It houses Froedtert Hospital, Children’s Hospital of Wisconsin, and the Medical College of Wisconsin. They serve as the core members obligated to repay debt.
The Curative Care Network, the Milwaukee County Behavioral Health Services, the Versiti Blood Center of Wisconsin’s Blood Research Initiative, and the hospital guest house Kathy’s House also reside on the campus as affiliate members.
The obligated group that serves as borrower is comprised of MRMC Thermal, MRMC Water, and MRMC Infrastructure. The latter two are new additions that as part of the upcoming sale are being folded into the master trust indenture.
Both the shared campus and shared utility costs are unique with just a few examples nationally, said S&P Global Ratings analyst Suzie Desai.
The Wisconsin Health and Educational Facilities Authority is conduit issuer for the deal, expected to price Thursday.
Piper Sander & Co. is underwriter. Kaufman Hall & Associates is advisor and Quarles & Brady LLP is bond counsel. The bonds are rated AA by S&P Global Ratings.
User rates go to repay the bonds under take-or-pay contracts. The core members signed a 30-year thermal contract in 2016 with the water and infrastructure contracts signed this year. Under the user contracts, the three core users pay the MRMC subsidiaries a base charge.
“Charges to the core members cover all costs and expenses…including debt service,” Bob Mlynarek, vice president of finance for MRMC, said in a recorded investor presentation.
“We apply the strong-link approach due to the take-or-pay user agreements that require the institutions to use the MRMC subsidiaries for certain utility and infrastructure needs and to cover any and all costs associated with operation and production for the entities, including debt service payments,” S&P said.
The AA rating “reflects our long-term rating on Froedtert and Children's, which are currently the highest-rated members of the pool,” S&P analysts Alexander Nolan and Desai said in the report on the deal. “The stable outlook reflects our outlooks on Froedtert and Children's, which are jointly the highest-rated members of the pool.”
Both carry AA ratings from S&P and the third core user, the medical college, carries S&P's AA-minus rating. The core users account for 90% of MRMC thermal plant usage and 65% of MRMC water system usage. The other members are not rated by S&P.
Froedtert Hospital also carries a Fitch Ratings AA.
The contracts have an early termination clause six and a half years in with a 90-day notice but includes sizeable termination costs.
“In the unlikely scenario that a contract was not renewed by any individual member, that member has to pay its pro-rata portion of the debt service related to the bonds outstanding and calculated share of costs associated with operating through the remaining contract term,” S&P said.
The other entities have separate non-take-or-pay contracts but their user charges include debt service costs.
A downgrade could occur if Froedtert or Children’s suffer credit deterioration or if the user agreements are modified in a way that suggests a strong-link approach under our criteria is no longer appropriate, S&P said.
Proceeds of the sale will refinance a $29 million draw on a $35 million line of credit from BMO Harris Bank NA by the Water and Infrastructure subsidiaries that financed the acquisition and improvements of a water system from Milwaukee County and various roadwork and utility improvements.
Another $7 million of proceeds will finance the replacement of a steam tunnel with another $25 million going to finance the initial $53 million stage of a two-phase $110 million redevelopment of the campus’ west side slated to begin late this year or early next year.
Those phases are designed to ready “the West Side of the campus for future development which to date has yet to be determined,” said Bob Simi, executive director of MRMC.
Along with the public offering, MRMC is borrowing $15 million of taxable bonds through a direct placement expected to close in August to refinance a line of credit draw.
MRMC established the Thermal subsidiary in 2016 with the acquisition of a thermal system from WE Energies and provides steam and chilled water for heating and cooling to the hospitals and medical, research, and teaching facilities on the campus.
A nearly $200 million bond issue by MRMC Thermal Service Inc. in 2018 funded the acquisition and improvements.
MRMC established the new Water subsidiary to own and operate the water assets that were operated since 2019 and formally acquired last December from Milwaukee County as part of Milwaukee County’s continued plan to divest itself of all of the MRMC campus infrastructure.
The system provides potable, sanitary and storm-water services to the campus. Since the acquisition the MRMC began projects “focused on improving the redundancy through production and distribution diversity. Improving reliability and building future growth as well as reducing the environmental impact through several green infrastructure improvements,” Simi said.
The green improvements include shifting to well water for the Thermal subsidiary’s cooling towers this year. Water usage has been reduced by 19% since 2019.
The Infrastructure subsidiary established in April will own, develop, construct and replace transportation and utility infrastructure improvements. Bond proceeds will refinance the system’s 87th Street roadwork and utility improvements that included replacing water, storm-water, sanitary and electrical systems under the road and the reconstruction of the road to improve traffic flow and building out bike lanes.
Growing traffic problems and a pedestrian death in 2016 led to the plans to overhaul 87th Street to support pedestrian, bike, public transportation and motorist traffic. The project was wrapped up last October.
The Thermal, Water, and Infrastructure subsidiaries have their own boards with some overlap. Each seven-member board has two leaders from Froedtert, two from Medical College, and two from Children's, as well as the executive director of MRMC.
The day-to-day operations of MRMC Thermal and MRMC Water are managed by Ever-Green Energy Inc. under management agreements, and the day-to-day operations of MRMC Infrastructure are managed by MRMC.
The campus houses more than 19,000 employees and sees more than 1.5 million patients and visitors annually.
