Posted on: Saturday, October 18, 2003
Health firm bond rating upgraded
By Deborah Adamson
Advertiser Staff Writer
A bond rating firm yesterday raised its outlook for $171.4 million of Hawai'i Pacific Health's special revenue bonds, citing "a significant turnaround of operating performance."
Standard & Poor's upped its outlook to "stable" from "negative" on the rated debt of HPH. A stable outlook, unlike negative, means the bonds' rating likely won't be lowered.
A lowered rating on bonds would make it more expensive for Hawai'i Pacific Health to raise debt.
"The outlook revision to stable reflects substantial improvement to HPH's operating income in 2003, as the anticipated benefits of 2001's merger began to take hold," said S&P credit analyst James Cortez in a report. HPH closed its acquisition of struggling Straub two years ago.
The Honolulu-based nonprofit now operates Kapi'olani Medical Center for Women and Children, Kapi'olani Medical Center at Pali Momi, Kapi'olani Medical Specialists, Straub Clinic & Hospital, Wilcox Memorial Hospital and Kaua'i Medical Clinic.
Through cost cuts and better operating efficiency as a result of the acquisition, HPH's operating income improved to a loss of $2.8 million in fiscal 2003 compared with a loss of $32 million last year, which included one-time merger charges, according to S&P.
In the first two months of fiscal 2004, operating income came to more than $2.1 million. The analyst believes operating profits will continue to improve.
The health system's ability to service its debt also got better.
Cash levels rose by $20 million last month from the sale of medical buildings. Negotiations also are under way to sell a long-term-care facility on Kaua'i to finalize in early 2004.
But HPH has $26.6 million of payments to make to former shareholders of Straub as a result of the acquisition.
Management also indicated plans to raise more debt in 2005 — for expansion and partly to pay for an electronic medical record system — similar in size to a new batch of bonds coming out in November.
Next month, $80 million in special-purpose revenue bonds will be issued.
The state will issue these tax-exempt bonds on behalf of HPH, since the nonprofit cannot issue debt.
However, HPH is responsible for repayment of debt.
The Hawai'i Constitution lets the state issue bonds on behalf of nonprofits if these groups serve at least one of seven special purposes, one of which is to provide healthcare to the public.
Since these bonds have the benefit of being tax-exempt, they still can lure investors with lower interest rates compared with other debt. Thus, it becomes a cheaper way for non-profits to borrow money.
About $23.5 million of the $80 million will be used to repay a loan HPH tapped to buy Straub. The rest would go toward Straub renovations, a new diagnostic center at Wilcox and operating upgrades and expansion at Kapi'olani hospitals.
Yesterday, S&P gave these new bonds a rating of "BBB+" as well as affirmed the same rating for HPH's other bonds.
The "BBB+" rating lies near the lower end of the investment grade range. Rating agencies split debt into two groups: investment grade and below investment grade, or "junk," bonds.
Within each group are levels of quality. S&P ranks them from "AAA" to "D."
The higher the grade, the better the borrower's ability to repay its debt.
Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.
