Muni Credit News May 30, 2017

Joseph Krist

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

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Louisiana Local Government Environmental Facilities and Community Development Authority

$231,045,000 Refunding Revenue Bonds and $19,840,000 Taxable Hospital Refunding Revenue Bonds

Moody’s: A2 (Stable) Standard & Poor’s: A (Stable)

The bonds are being issued with the benefit of a recent upgrade of its rating on the credit to A2 from A3. Moody’s credits the system’s strong statewide presence as a leading provider of women’s and infant services and strong brand equity, resulting in a high market capture of newborn deliveries in the Baton Rouge service area. It also cites the system’s multiyear improvement in liquidity and leverage metrics, conservative asset allocation, and a debt structure which includes the absence of a defined benefit pension plan and debt derivatives, maintenance of strong operating performance, and savings related to this refunding.

Woman’s Hospital Foundation is an 168 adult licensed bed, 122 bassinet, and 84 bed NICU facility that specializes in obstetric, gynecological, breast, newborn and neonatal services for women and infants in Baton Rouge and the surrounding areas. WHF is the only independent, non-profit women’s hospital in the country with the 17th largest obstetric service in the nation. The system operates one of nine level three regional neonatal intensive care units within the state of Louisiana. The bonds are secured, subject to certain limitations, by a grant of security interest in the receipts of the Woman’s Hospital Foundation. With the revision of the Master Trust Indenture the system is expecting to remove the security provision of a mortgage lien on certain properties of the WHF which includes the hospital and land upon which it is situated. The revision of the MTI will also remove the debt service reserve fund.

COLORADO HIGH PERFORMANCE TRANSPORTATION ENTERPRISE

$165,500,000 C-470 Express Lanes Senior Revenue Bonds

Fitch: “BBB”

Construction phase for the express toll lanes (ETLs) is relatively straight-forward with a 38-month construction timeframe. Permit risk is low with construction occurring within the existing operating highway footprint. The project is the development of a variable toll rate express lane on the southern portion of the 470 highway project which surrounds Denver. It is designed as a congestion reliever and does not have competition from HOV lanes on the main road. The Enterprise is authorized the set and collect tolls which will be determined by congestion levels on the adjacent lanes.

The project represents the expansion to a growing concept of variable time of day congestion based lanes being established on existing major highways. These facilities exist within established free and toll based facilities. Like the others, this project will be built using a P3 model for design, construction, and operation. It employs a fixed-price, date-certain contract with an experienced contractor group backed by robust parent guarantees sufficient liquidity and schedule flexibility.

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PR BANKRUPTCY UPDATE

The U.S. Trustee filed a motion last week supporting the appointment of an Official Retiree Committee to represent the interests of pensioners in the bankruptcy petitions filed on behalf of the commonwealth and the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym), but objected a request by the Ad Hoc Retiree Committee to have the court appoint the group as its members.

The Trustee was answering a motion filed by a group called the Ad Hoc Retiree Committee, which comprises 17 organizations and individual retirees who on May 5 asked federal Judge Laura Taylor Swain to appoint an official committee representing retirees and them as its members. With a $46 billion liability, the commonwealth’s employee retirement system is expected to suffer cuts. There are more than 200,000 government retirees.

Assistant U.S. Trustee Monsita Lecaroz Arribas said the Trustee agrees that retirees should have an official committee and, therefore, does not oppose the appointment of a retiree committee. “This case clearly needs a retiree committee and sooner rather than later. Given this situation and the comments of the Court and the various constituencies at the first day hearing, the United States Trustee intends to solicit for and to appoint a retiree committee. The United States Trustee expects to complete the committee solicitation process no later than June 16 and will hold one or more formation meetings as soon as possible after the solicitation is complete,” she said.

The Trustee, however, objected the motion to the extent it asked the court to appoint or direct the appointment of the alleged Ad Hoc Retiree Committee as an Official Retiree Committee because courts do not have that authority, she said. Under the U.S. Bankruptcy Code, she said, appointing members of an official committee is a responsibility entrusted exclusively to the Trustee. “The Bankruptcy Code does not authorize a Court to direct the United States Trustee to appoint a pre-petition committee as the official committee or to appoint specific members to an official committee.

“Accordingly, that portion of the Motion must be denied. In filing this response, the United States Trustee does not suggest that members of the Ad Hoc Retiree Committee could not serve on an Official Retiree Committee (or any other official committee). But the law on committee formation must be followed,” Lecaroz Arribas said. It added that if the U.S. Trustee were to appoint the Ad Hoc Retiree Committee as members of the official retiree committee, it could be prone to challenges that the committee was unfairly chosen or does not adequately represent the group.

Other highlights of the initial bankruptcy hearing include that the  judge approved most of the motions for case management, but with amendments requested by the creditors. Despite the complaints of Cofina bondholders, she agreed to consolidate all claims under the lead claim of the commonwealth for administrative purposes only, allowing claims to continue to be filed on other dockets. Attorney Martin Bienenstock anticipates that the fiscal oversight board is preparing to file Title III for the Highways and Transportation Authority (HTA), and officials said other entities will follow.

Judge Taylor Swain did not rule on a motion by Bank of New York Mellon, Cofina’s trustee, on how to proceed with the payment of $16.3 million to be paid June 1 despite the lawyer’s insistence. The judge also did not rule on a request for an order to compel suppliers of utilities to continue to provide service. Lawyers representing Cofina raised the issue that their interests are not protected because the fiscal board as well as the Puerto Rico Fiscal Agency and Financial Advisory Authority (FAFAA) are also representing the interests of general obligation bondholders. The GOs are disputing the legality of Cofina and want sales and use tax revenue to be used to pay them.

This week, a letter written on behalf of Fafaa on May 16 states that funds held at the Bank of New York Mellon (BNYM), the trustee of sales-tax revenue bonds issued by Cofina, are the property of Cofina. The assertion appears to support the corporation’s legality. Senior beneficial bondholders and an insurer of certain senior Cofina bonds claim that because the Fiscal Plan Compliance Law will allow the commonwealth to take Cofina revenues to pay for various government services, a default should be declared. A group of subordinate beneficial holders of Cofina bonds argues that there is no default and they should be paid as usual. Cofina, on the other hand, contends that no default has occurred and that if any pledged sales-tax revenues were to be diverted, it would still have 30 days to “cure” any default.

CHI TAKES STEPS TO STABILIZE FINANCES

Catholic Health Initiatives, the nation’s third-largest nonprofit health system has seen its ratings under continuing pressure as it struggles with a high debt load. It has had a difficult time bringing a number of acquisitions together as it undertook a plan of consolidation in order to achieve scale as it deals with a shifting healthcare environment. While we have endorsed consolidation across states as a strategy for withstanding the current uncertainty in the healthcare space, the strategy is not without risks.

Englewood, Colorado-based CHI operates in 17 states and comprises 104 hospitals, including four academic health centers and major teaching hospitals as well as 30 critical-access facilities; community health-services organizations; accredited nursing colleges; home-health agencies; living communities; and other facilities and services that span the inpatient and outpatient continuum of care. In fiscal year 2016, CHI provided more than $1.1 billion in financial assistance and community benefit – a 13% increase over the previous year — for programs and services for the poor, free clinics, education and research. Financial assistance and community benefit totaled more than $2 billion with the inclusion of the unpaid costs of Medicare. The health system, which generated operating revenues of $15.9 billion in fiscal year 2016, has total assets of approximately $22.7 billion.

Some of the operating problems which can exist in the currently turbulent healthcare space have become evident for CHI in Kentucky. KentuckyOne Health, the largest and most comprehensive health system in the Commonwealth is a part of CHI. KentuckyOne Health was formed when two major Kentucky health care organizations-Jewish Hospital & St. Mary’s HealthCare and Saint Joseph Health System were merged. In late 2012, the organization formed a partnership with the University of Louisville Hospital | James Graham Brown Cancer Center. It has more than 200 locations including hospitals, physician groups, clinics, primary care centers, specialty institutes and home health agencies in Kentucky and southern Indiana.

In December, the University of Louisville Hospital agreed with KentuckyOne to end KentuckyOne’s management of the academic medical center. The university hospital will begin managing itself in July after the university accused KentuckyOne of failing to make about $17 million in promised program improvements and falling $29 million behind in making capital improvements to the facilities.

Now, as it continues talks with Catholic healthcare system – Dignity Health –  about a combination, KentuckyOne has announced that it wants to sell its hospitals in the competitive Louisville market and focus on its healthier markets in Lexington and eastern Kentucky. This would involve the sale of Jewish Hospital, Frazier Rehab Institute, Sts. Mary & Elizabeth Hospital, Medical Centers Jewish East, South, Southwest and Northeast, Jewish Hospital Shelbyville, Saint Joseph Martin and KentuckyOne Health Medical Group provider practices in Louisville and Martin.

Catholic Health Initiatives reported an operating loss of $483 million from its fiscal 2016. The operating loss in fiscal 2016, which ended June 30, compared with an operating surplus of $24 million in fiscal 2015. In its fiscal second-quarter financial report ended Dec. 31, CHI disclosed that in Kentucky its operating earnings before interest, depreciation and amortization had fallen to $17.1 million in the quarter compared with $30.5 million in the year-earlier quarter. CHI cited unfavorable shifts in payer mix plus labor costs that had risen as a percentage of net patient services revenue to 49.4% compared to 44.8% in the same period of the prior fiscal year. That represented $26.2 million more in labor costs for the quarter vs. the year-earlier.

Currently, CHI’s debt is rated Baa1 and BBB+ after its most recent downgrades this Spring.

CA HOSPITAL MERGER PLAN DEEMED ANTICOMPETITIVE

Santa Barbara, Calif.-based Cottage Health and Sansum Clinic, also in Santa Barbara announced a proposed merger in June 2013. It would have combined Cottage Health’s three hospitals and various enterprises with roughly 24 Sansum-owned outpatient clinics across Santa Barbara County. Cottage Health reportedly agreed to divest its interest in its outpatient centers and would become a primarily inpatient entity. Nonetheless,  the Federal Trade Commission rejected the organizations’ merger proposal on grounds that the merger would prove anticompetitive.

In January of this year, Cottage saw Fitch downgrade its ratings on its outstanding debt from AA- to A+. Total long-term debt at Nov. 30, 2016 was $417 million. Fitch cited  weakened operating performance in 2015 and 2016 combined with an increase in debt issued in 2016. Operating margin is projected to be negative 0.2% for 2016 compared to a budget of 2.9% reflecting increased benefits expense, an erosion in payor mix, higher than budgeted electronic medical record (Epic) implementation expenses, and lower than expected provider-fee funding.

The reduced operating margins are projected despite Cottage’s strong market share in its service area at around 90% and its position as the only provider of inpatient services on the south coast of Santa Barbara County.  The proposed merger reflects the pressure even dominant service providers in wealthy service areas feel when the reimbursement environment is uncertain and under pressure.

OBAMACARE SUBSIDIES LEGAL UPDATE

The nation’s state insurance commissioners urged the Trump administration last week to ensure continued funding for payments to health insurers to cover cost-sharing reductions for low-income exchange plan members.

The National Association of Insurance Commissioners, most of whose members come from Republican-led states, told Office of Management and Budget director Mick Mulvaney in a letter that continuing the cost-sharing reduction payments “is critical to the viability and stability of the individual health insurance markets in a significant number of states across the country.” It goes on to say “there is increasing concern that more carriers will pull out of this market and rates will continue to rise, leaving consumers with fewer and more expensive options, if they have any options at all. This is not a theoretical argument – carriers have already left the individual market in several states, and too many counties have only one carrier remaining. The one concern carriers consistently raise as they consider whether to participate and how much to charge in 2018 is the uncertainty surrounding the federal cost-sharing reduction payments.”

The NAIC also wrote to Senate leaders urging them to take swift action to stabilize the individual insurance markets, including funding the CSR payments and providing sufficient money for reinsurance programs or high-risk pools. Specifically, it urges the Senate to: 1) ensure the cost-sharing reduction (CSR) payments are fully funded in 2017 and 2018; and, 2) provide sufficient and sustained market stabilization funding to states for the establishment of reinsurance programs or high risk pool programs. These two actions alone would go a long way toward stabilizing the individual markets in our states while legislative replacement and reform options are debated.

The commissioners warned Mulvaney, a fierce opponent of the Affordable Care Act and critic of the law’s CSR payments, that more insurers will exit the markets in 2018 and premiums will spike if carriers don’t receive assurance soon that they will receive the approximately $7 billion in federal payments.

Immediate action is needed, they said, because carriers are making decisions now whether to offer plans on the exchanges in 2018 and where to set premiums.

Citing uncertainty over the CSR payments as one big factor, insurers say they’ll have to charge much higher rates for next year. Plans in Connecticut have requested increases ranging from 15% to 34%. Maryland rate hikes range from 18% to nearly 60%. Most of Virginia’s insurers have requested double-digit jumps and it is expected that the same will occur  in the New York State market.

House Republicans successfully sued to block the ACA-required CSR payments on the grounds that the Obama administration funded them without the money being appropriated by Congress, whose Republican majority refused to approve it. The Obama administration appealed the district court’s ruling, but the Trump administration hasn’t declared whether it will continue the appeal. In the meantime, a federal appeals court granted the Trump administration a 90-day delay on its decision to appeal a case brought by House Republicans against ObamaCare subsidies paid to insurers.
Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

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