Muni Credit News December 11, 2017

Joseph Krist

Publisher

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ISSUE OF THE WEEK

$934,015,000*

Composite Issue

PARTNERS HEALTHCARE SYSTEM

REVENUE BONDS 

Some eleven months after having its rating outlook revised downward to negative, Partners Health returns to the market with a significant debt issue and an outlook revised to stable. It’s Moody’s Aa3 remains based on “multiple factors including Partners’ significant scale and leading market presence in eastern Massachusetts combined with a national and international draw for high acuity and complex patients to the system’s two academic medical centers. Further undergirding the rating is Partners’ large research organization that helps the organization attract high caliber physicians and researchers and supports the system’s large fundraising operations.”

The outlook has been revised to stable based on Moody’s expectation that operating performance at the provider division will largely return to historical levels in FY 2018 and that the insurance division will generate roughly breakeven results. The assumption is the provider division will generate a roughly 2% operating margin and that the insurance division will generate roughly breakeven results. The outlook could be changed again to negative if these targets are not met throughout the year or if the acquisition currently being contemplated results in material financial dilution or other challenges.

Partners Health is Massachusetts General Hospital (MGH), Brigham Health (parent of Brigham and Women’s Hospital and Brigham and Women’s Faulkner Hospital), NSMC HealthCare Inc. (parent of North Shore Medical Center), Newton-Wellesley Hospital, Partners Continuing Care (parent of several non-acute service providers, including the Spaulding Rehabilitation Hospital Network), Neighborhood Health Plan, Partners Medical International and Partners HealthCare International. Partners also controls Partners Community Physicians Organization which is a management services organization that supports an integrated managed care strategy and administers its physician network. MGH is the sole member of The General Hospital (commonly referred to as Massachusetts General Hospital), Cooley Dickinson Health Care Corporation, McLean HealthCare, Martha’s Vineyard Hospital, Nantucket Cottage Hospital and Wentworth-Douglass Hospital.

Partners is considering the integration of the Massachusetts Eye and Ear facility which is located adjacent to Mass General. Partners is holding out for insurers to bring Mass. Eye and Ear up to rates received by Partners’ top teaching hospitals. This would likely address Moody’s dilution concerns. If completed, the merged entities would control 45 percent of all ear, nose and throat visits and day surgery in Massachusetts and 36 percent of ophthalmology care.

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TAX REFORM IMPACTS STADIUM DEBT BEFORE IT TAKES EFFECT…

The potential impact of tax reform limitations on stadium and arena financing has begun even before the legislation is enacted and signed into law. This week a financing for the Louisville Arena Authority’s Project Revenue Bonds was amended to alter the nature of a private operator’s role in the deal to ensure that the transaction retained its tax exemption.

Specifically, the contract with AEG Management (AEG) originally included a $1.5 million annual minimum contractual guarantee from AEG Management to Louisville Authority Arena (LAA). This guarantee has been removed to eliminate the risk that the bonds could lose their tax-exempt status for having too much private use revenue. The contract was amended to state that if the $1.5 million target is not met for two consecutive years then LAA and AEG will endeavor, but are not required, to work together to remedy the shortfall within two or three months or reduce the future $700,000 annual payment made to AEG to make up the difference.

This change lowers the cash flow certainty under this AEG contract because if the contract becomes uneconomical for AEG for several years, the contractual requirement to remain is weak, especially given AEG paid funds to LAA for capital and thus would be paid out if their contract was eventually terminated by LAA.

A new debt service schedule was issued and is notably lower than the prior one with the smallest decline being about $2 million in one year with a higher decline in debt service costs in all other years, which improves the resiliency of the structure. The lower debt service also offsets any potential loss of revenues from the AEG contract.

Issues like this are all part of the mix of challenges facing stadium finance planners going forward. We are looking to see how Las  Vegas structures its plan for a new Raiders facility and how San Diego approached a facility designed to attract a Major league Soccer franchise and redevelop the Qualcomm Stadium area.

…WHILE IN ST. LOUIS THE BLUES GET THEIR DEAL AFTERALL

This week the NHL’s St. Louis Blues scored a huge goal in their effort to get the City of St. Louis to supply public funding for a renovation of the Scottrade Center, their downtown St. Louis home. St. Louis Comptroller Darlene Green followed court orders Tuesday and turned over her signed copy of a $64 million stadium financing agreement. In August, Ms. Green had refused to approve  an agreement because in her view it was injurious to the City’s credit.

The Blues filed a motion in St. Louis Circuit Court saying Green violated an order from Nov. 27 to sign the agreement. Clearly the Comptroller was unhappy with the outcome. “The Comptroller does not comply with this finance agreement voluntarily. As she has stated, this financing agreement is not in the best interest of city taxpayers; it draws upon the city’s general fund for repayment and may harm the city’s credit.”

The exact form of how the City will come up with the funding is now uncertain given the pending ban on tax exempt private activity bonds expected to be included in the tax reform package awaiting Congressional approval. The agreement does contemplate the issuance of debt to be secured by City revenues. The Court said nothing in the city charter gives the comptroller “the discretion to refuse to countersign the financing agreement based on her belief that the expenditure is imprudent.”

A separate lawsuit against the deal was also settled after the Comptroller’s agreement was reached. The plaintiffs in that suit contended the public-private partnership it amounted to an unconstitutional gift of public money to primarily benefit private interests. Blues President and CEO Chris Zimmerman said the Blues will now turn their attention to the Missouri Legislature to secure millions of dollars in additional public financing for future phases of Scottrade Center renovations. A bill to secure state funding has been pre-filed for the 2018 session, Zimmerman said.

During a Blues broadcast we heard on Saturday, the team has been influenced by amenities offered in new arenas which have been opened by other teams. He made those comments from the new Little Caesars Arena in Detroit. Since the 1960’s, St. Louis had lost three other professional sports franchises to other cities – the NBA Hawks, and the NFL Cardinals and Rams.

SCRANTON PARKING P3 CONTINUES TO UNDERPERFORM

In an effort to help the City of Scranton avoid bankruptcy earlier in the decade, a decision was made to enter an agreement to turn over the operation of the city’s parking system operator. ABM Parking Systems now has the daily control and management of all five of Scranton’s parking garages and nearly 1500 parking meters under a 45-year lease concession agreement.

Recently, Standard and Poor’s announced that it had lowered the rating on debt issued and secured by system revenues to BB- from BB+. It referenced the parking system’s materially weak financial performance, erosion in liquidity, and reliance on factors outside of the concessionaire’s control that we believe considerably influence the parking system’s financial performance, liquidity, and ability to fund the project’s capital requirements.

A negative outlook was assigned reflective of an expectation that coverage may remain below the rate covenant over the near term and a view that outside capital (which has yet to be secured) may be necessary to stabilize cash flows from operations over the two-year outlook period.  The move highlights the point that private operation is not always a panacea when the underlying economics of an area supporting a particular project financing are weak. It is an important point to keep in mind when evaluating any project, whether it be publicly or privately managed.

MEAG AND GEORGIA POWER EXPECT VOGTLE GUARANTEE PAYMENT

The owners of the expansion facilities at the Vogtle nuclear plant have moved one step closer to at least some financial relief due to the suspension of the two unit expansion at the long standing generating facility. The U.S. Department of Energy (DOE) has issued the final approval needed for Georgia Power’s new agreement with Toshiba, the parent company of former primary Vogtle contractor Westinghouse, to receive all remaining scheduled payments from Toshiba in the amount of approximately $3.2 billion by Dec. 15, 2017. Georgia Power’s proportionate share of the payments is approximately $1.47 billion.

To date, the Vogtle co-owners (Georgia Power, Oglethorpe Power, MEAG Power and Dalton Utilities) have received $455 million in total scheduled payments from Toshiba under the parent guarantee for the Vogtle project – a structure which was put in place to protect Georgia electric customers as part of the original contract.

On August 31, Georgia Power filed a recommendation with the Georgia Public Service Commission (PSC) to continue construction of the Vogtle nuclear expansion supported by all of the project’s other co-owners. The recommendation was based on the results of a comprehensive schedule, cost-to-complete and cancellation assessment launched following the Westinghouse bankruptcy. The Georgia PSC is reviewing the recommendation to move forward and is expected to make a decision regarding the future of the Vogtle 3 and 4 project as part of the 17th Vogtle Construction Monitoring (VCM) proceeding.  That process continues this week.

Recognizing that completing the Project in the absence of the EPC Agreement will entail different risks and may require additional decision-making points for the Owners, the Owners agreed to revise the Project Ownership Participation Agreement to establish additional conditions that will require Owner approval.

MORE TAX REFORM DRIVEN ACTIVITY

Two major airports are in the market this week for just under $2 billion of refunding debt in advance of tax reform legislation which would end this financing tool and possibly eliminate capital development projects at airports.

Phoenix will issue nearly $500 million of junior lien debt while Philadelphia will issue the balance. Houston will offer $135 million of soon to be eliminated special facilities bonds for its anchor tenant United Airlines. They are examples of just what sort of damage the proposed limitations could do to efforts to modernize the nation’s air transport infrastructure. You know, the stuff candidate Trump called third world. Now that he is a President without any policy expertise, he advocates policies which would stymie achievement of his stated goals. Go figure!

There are also, in addition to our issue of the week, another six hospital issues scheduled for sale this week before tax provisions which are feared to interfere with tax exempt hospital bonds are voted on.

BACK TO WORK ON THE OKLAHOMA BUDGET

The special session of the Oklahoma Legislature ended in mid-November during which 194 measures were proposed. Out of those 194 bills, a total of four became law—though one of those four successful measures—the budget bill—was line-item vetoed by Governor Mary Fallin.

When the special session began, the state was facing a potential budget shortfall of $215 million. By the end of the session, that number had been brought down to $118 million, though if no new revenue bills are passed soon, that number could balloon to $600 million by 2019. Lawmakers rejected a total of almost a billion dollars’ worth of additional revenue over the next two years.

Now with just over two months before the 2018 legislative session is due to begin, Oklahoma Gov. Mary Fallin called lawmakers to their second special session the week before Christmas in hopes of raising revenue to patch a $111 million budget gap in the current fiscal year.

The governor reports there is still a need for additional revenue to address the loss of funding and also to fund a pay raise for the state’s teachers. She believes lawmakers will need to find a plan that will raise around $800 million. Fallin’s office reports that $509 million of the 2018 fiscal year budget is one-time funds and future obligations. The state will face a starting deficit of approximately $700 million in 2019.

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