Mayo Clinic's $5 billion expansion may bring new debt issuance

The Mayo Clinic has ambitious plans that start at home. When the Rochester, Minnesota-based nonprofit healthcare system updated its five-year plan last year, it said the move was part of a "strategy to transform healthcare globally."

The update reflected changes from a $5 billion expansion of Mayo's flagship Rochester campus. 

Mayo's board of trustees approved the strategic expansion initiative in November. The expansion, which represents Mayo's biggest capital investment ever, is scheduled to break ground later this year.

The Mayo Clinic

"Management plans to issue some debt, as in prior years, to support capital spending, although timing and amounts are less certain," S&P Global Ratings said in a report last year, adding that it expected new debt issuance within the next year or two. "While we believe the system could absorb some debt, the degree to which it will be able to do so will depend on amount of issuance, performance trends, and balance sheet strength."

Mayo is nationally known for high-level specialty care for serious conditions like cancer and heart disease, combined with medical education and research. Founded in Rochester, it operates locations in Florida, Arizona and London, as well as a regional hospital and health system serving Minnesota, Wisconsin and Iowa.

Chief Financial Officer Dennis Dahlen said Mayo has been planning the Rochester expansion for quite some time, and the effort to fund it has been an integral part of its long-term financial planning.

"A benefit of that long-range thinking is that we have significant flexibility in how we fund the project," he said. "Our options include a mix of cash reserves, cash flow from operations over the six-year project, philanthropy, and potentially new debt. The amounts and timing of each will be determined by the project's progress and cash outflows as well as market conditions during the construction period."

Any bonds that are issued would be supplementing cash reserves, cash flows from operations and philanthropy, he added.

Dahlen said Mayo has made "modest" adjustments to its financial planning processes due to the expansion. It has extended forecasts and models to incorporate the Rochester project and "to better understand the alternate financing scenarios and performance requirements during this sustained period of construction," he said.

Gilbane Building Co. won the contract to lead the six-year expansion project, Construction Dive reported. The construction and development firm, headquartered in Providence, Rhode Island, will work with architect Foster + Partners to get some of the renovated facilities open by the end of 2028.

The architecture of the new buildings, which will span 2.4 million square feet, incorporates more sunlight and access to nature, according to a Mayo press release.

Medical neighborhoods, linked both horizontally and vertically, will be designed around common diseases and patients' needs. And the buildings will feature a flexible grid, meaning that rather than designing spaces for fixed uses – surgery rather than imaging, or vice versa – suites will be able to transform as clinicians' priorities change.

Moody's Ratings assigns a rating of Aa2 to Mayo and to its Series 2021 taxable and Series 2022 bonds. The outlook is stable.

Mayo reported more than $4 billion of long-term debt on its most recent audited financial report, for the year ending Dec. 31, 2023.

It has issued tax-exempt debt through conduits the city of Rochester, Minnesota, the Phoenix Industrial Development Authority, and the city of Jacksonville, Florida, and taxable debt under its own name, according to its financials.

S&P assigns its AA rating to Mayo's revenue bonds. The outlook is stable.

In an April 2023 report, S&P credited Mayo with a strong financial profile but pointed to weakened performance from higher labor expenses, a recent trend across the healthcare sector.

"The balance sheet has also attenuated, but in absolute terms reserves are considerably greater than 2019 levels and all balance sheet ratios are still stronger compared with those of 2019," S&P noted. 

Not included in S&P's balance sheet ratios is an additional $4 billion of restricted operating and endowment investments which bolsters Mayo's research efforts and educational programs.

The rating agency observed that Mayo is going through a period of elevated capital spending, and said it expects to hear more in coming years about a major Rochester-based project "aimed at expanding and updating clinical space."

Mayo has a strong national brand, a broad clinical footprint, a healthy and flexible balance sheet and an experienced management team, S&P said.

Offsetting that strength, the rating agency noted, are the system's potentially reduced performance for the next few years as capital spending ramps up; its significant operating investments to support its strategic plan; its high expenditures for a few extended projects; and the long-term risk of higher postretirement employee health care benefit liabilities.