Altru Health System in Grand Forks, North Dakota, hits the market this week with a $383 million new money and refunding deal to help pay for a replacement hospital the system put on hold as it dealt with the COVID-19 pandemic.
About $322 million of proceeds will go toward the new $380 million hospital. The refunding along with additional proceeds from a premium structure and equity contribution will result in $18 million of net present value savings.
The city of Grand Forks is serving as the conduit issuer. BofA Securities is running the books and Barclays is a co-manager. Ponder & Co. is advising the system and Dorsey & Whitney LLP.
The bonds are secured by pledge of gross receivables and mortgage on the existing hospital and replacement hospital. The system is financing the project with bond proceeds, cash and philanthropic support.
Altru expects to complete the new hospital project in 2024. The system broke ground in 2019 but in April 2020 paused it to focus on managing through the pandemic.
The system put the project on hold after state government ordered that most non-essential projects be halted to prepare for the pandemic. The system also expected a $50 million operational hit if it continued at the time, Steven Weiser, the system’s president, said in an investor presentation.
“While 2020 was a challenging time for us all, Altru was able to make decisions necessary to enter 2021 with a strong financial outlook,” David Molmen, the interim chief executive officer, said in a recent statement announcing the project’s resumption.
The system, with $607 million of annual revenue, holds a lead market share and is the only major healthcare provider between Duluth, Minnesota, and Minot, North Dakota, an area that spans 400 miles.
While the system’s operational turnaround in recent years benefits the credit, the more than doubling of debt that will strain its balance sheet metrics in the near-term.
Fitch Ratings downgraded the system to BBB-minus from BBB; it had cut the system two notches from A-minus in 2019. Fitch assigns a stable outlook.
The downgrade “is driven by the significant escalation in both debt and capital risk that Altru will incur as it resumes construction of its replacement hospital,” Fitch said.
Moody’s Investors Service affirmed the system’s Baa2 rating and offered some good news for the system in moving the outlook to stable from negative.
After the deal, the system will have $460 million of debt outstanding.
Fitch believes the system can maintain its low investment grade rating based on its general strengths, which if sustained, would allow Altru to absorb the execution risk and additional debt.
Altru saw operating margins of 11.1% in 2020 and 12.3% for the first half of 2021 following weak margins of 3.6% in 2019 and 4.9% in 2018. Altru received $31.8 million in federal aid from the CARES Act in March 2020 of which $26 million went to offset lost revenues that totaled $50 million early in the pandemic.
Apart from the stimulus funding, most of Altru's operational turnaround in 2020 and 2021 was attributed to structural, long-term changes it made to its cost structure, Fitch said.
“The stable outlook reflects the expectation that strong performance measures will be maintained, liquidity will remain favorable, and that the project will be completed on budget and on time,” Moody’s said. “We also expect that debt will not further increase following the current debt issuance, and that Altru's high level of debt will be digested over time.”
In addition to its own facilities, Altru serves as the primary teaching hospital for the University of North Dakota Medical School. It’s also a member of the Mayo Clinic Care Network.
