Muni Credit News September 13, 2016

Joseph Krist

Municipal Credit Consultant



Henry Ford Health System is an established multi-hospital system serving southeastern Michigan. HFHS is a large, fully integrated health system based in the Detroit metropolitan area. The system operates four acute care hospitals, two behavioral health hospitals, multiple ambulatory care and outpatient service facilities, a sizable health insurance business, and a large employed group physician practice. HFHS’s flagship hospital, Henry Ford Hospital, is a tertiary/quaternary referral hospital located near downtown Detroit. It has long been positioned to cope with the ever changing healthcare landscape. This has been borne out by its latest rating review in association with an $820 million financing scheduled for this week.

HFHS plans  to implement a new Master Trust Indenture as a component of the contemplated transaction. Bonds will now be secured by a pledge of Gross Receivables from Obligated Group Members. The MTI will include a debt service covenant of 1.1x and it will be an event of default if it fails to maintain coverage of at least 1.0x for two consecutive years. If coverage results between 1.0x – 1.1x, a consultant must be called in. HFHS’s insurance division is a Designated Affiliate and not an Obligated Group Member. However, Obligated Group Members may cause Designated Affiliates to upstream money to the Obligated Group.

The bonds under the new Master Trust Indenture earned an A3 rating with a positive outlook. The rating is based in the system’s large size and HFHS has a long history of operating an integrated delivery network with a large group of employed and community physicians, multiple hospitals including high acuity facilities, and a large health insurance division. The rating would likely be higher were it not for HFHS’ location in highly competitive markets which include other large and well-funded competitors. Its  operating margins have historically been below that of peer organizations which is somewhat reflective of its service to the inner Detroit market.

HFHS is another reflection of our ongoing thesis that size does and will continue to matter in the healthcare sector.


Cumberland County, NC is considering a proposal which would dedicate up to 75 percent of new property tax receipts generated around a proposed baseball stadium to help pay for it. County  commissioners recently discussed in a closed meeting giving up to three-fourths of any new tax revenue from a special tax district to help the city of Fayetteville build a proposed minor league ballpark.

City officials have not yet revealed the proposed district’s boundaries, but they would include private, taxable investment around the stadium site of almost 10 acres. The city has capped the potential stadium project at $33 million. The city would borrow money for it. The city also asked if the county could make a one-time contribution to help defray the debt. He said the county commissioners considered using some of the reserves from the county’s recreation tax district, which is levied on property outside the city limits, but they were told using the money inside the city would be restricted.

In August, the council unanimously approved a nonbinding memorandum of understanding that would bring a Class A team owned by the Houston Astros. The memorandum would guarantee the city a Minor League Baseball team for 30 years, with lease payments during that period totaling more than $9 million. The city would use the lease revenue to help retire the construction debt. Other sources would include new city taxes from the special district around the stadium – and apparently, three-fourths of the county’s portion of the new tax revenues from the district.

The city would open the stadium by April 2019, although the team would play for two years in a temporary venue, starting next season. The team would play in the Carolina League as part of an expansion that would include a new Texas Rangers-affiliate in Kinston in eastern NC. It’s not clear what, if any, other revenue sources the city would require, or how much including $60million invested on a new hotel, retail and residences next to the stadium. They also are planning a $15 million renovation of an existing hotel into rentable apartments. The renovation and new investment would be part of the special district covering 10 acres around the stadium from which new tax revenues would be dedicated

While this project is under consideration, opponents of such financings will find plenty of ammunition in a new study from the Brookings Institution on the cost to the federal government due to subsidies in the form of municipal bond issuance for major professional sports facilities. Brookings examined the financing for all professional sports stadiums newly constructed, majorly renovated, or currently under construction since 2000 for Major League Baseball, the National Football League, the National Basketball Association, and the National Hockey League.  It estimated that the value of the total subsidy including lost revenues on the tax exempt interest amounted to $3.7 billion.


The high yield municipal market has often been the last resort for projects of questionable value. This reflects the nature of the risk that underpins the credits for these deals whether it be based in the technology of the project, the uniqueness of the project, or the lack of fundamental economics of the project. These projects often have been unable to obtain cost effective financing in the traditional home for such speculative investments. It’s why things such as medium density fiber board from recycled wood, manure to methane, small scale ethanol manufacturing, and various dubious entertainment venues have all been financed in the tax exempt high yield market with often poor investment results.

The latest potential entrant to this arena is the proposed $1.15 billion financing for infrastructure costs at the American Dream project in East Rutherford, NJ. It’s the project one has seen under construction for seemingly forever next to Met Life Stadium in the Meadowlands. The one where the cranes haven’t operated for a year. The one that has gone through multiple developers and governors. The one that has generated lots of negative headlines but no sales after thirteen years of development. So in many ways it is a natural for the municipal high yield market. Now the project faces another hurdle.

The New Jersey Alliance for Fiscal Integrity, a nonprofit group said to be backed by retailers has filed a motion with New Jersey’s appellate court to stop state agencies from helping a private developer build what would be one of the biggest malls in America. The suit could stop, or at least delay, currently idled construction of American Dream, a retail-entertainment complex in the Meadowlands that’s been in development since 2003. Triple Five, a Canadian-based company, is the third developer to try to complete the project, which had previously been known as Xanadu.

The  lawsuit,  raised a number of procedural objections to actions taken by the New Jersey Sports and Exposition Authority and the New Jersey Economic Development Agency to help the developer borrow over $1 billion through tax-free municipal bonds to finish construction. The Sports and Exposition Authority board approved the issuance of what it contends will be non-recourse bonds — which means that the bond buyers take the risk should the project fail — and then have them be purchased by the Wisconsin Public Finance Authority.  The Wisconsin issuer has the ability to issue private purpose bonds which the New Jersey entities do not have driven by tax regulations. While infrequent, the use of out of state issuers is not new.

This construct would ostensibly prevent the State of New Jersey from financial involvement. Throughout the long life of the project, there has been consistent political concern regarding the potential for the project to require direct financial resources from the State of New Jersey. This plan to assist Triple Five – the current developer – was made public this summer and then approved over a matter of weeks. Usually, projects like this turn to the municipal bond market as the financier of last resort when traditional sources are either unavailable of prohibitively expensive. That usually reflects a lack of belief on the part of the usual sources in project viability. This project has been plagued by consistent questions about the need or demand for a project of this scale in this marketplace.

According to the Alliance, the board’s no-bid selection of the Wisconsin agency violates a two-decade-old executive order that requires that private bonds be sold through a competitive bidding process. The group also asserts that changes in the language of the bond issuance also mean that the bond sales can’t go forward unless the state Local Finance Board approves the new terms. The suit follows a formal written request to New Jersey Sports and Authority Chairman Michael Ferguson to delay any issuance of the bonds.

The Alliance is a 501c(4) organization, and is exempted from disclosing its funders. It has said the group includes retailers and other businesses as well as “concerned citizens”. Increasing the intrigue, the Alliance’s attorney has a longstanding professional relationship with Governor Chris Christie, having worked both within the Christie administration, and for Christie when he was U.S. Attorney for New Jersey.


As has been the case with previous interest rate cycles, the volume of continuing care retirement community (CCRC) deals continues as we approach the fourth quarter. With talk of a rise in interest rates influencing the markets, we are not surprised to see a potential dampening effect on home sales activities. It is exactly those factors which should give investors pause and make sure that they are compensated for the risks which they are being asked to finance.

The last period of low absolute rates and relatively favorable spreads saw many   investors including funds make extensive purchases of this paper. The perceived high level of real estate activities convinced investors that the risk of depending on sufficient numbers of older home owners to be able to readily sell their homes at high prices was enough to offset the marketing risk associated with these projects. When the real estate market crashed, that ability did as well leaving many operators with inventories of unsold units and shortfalls in revenues for operations. This left many unable to pay off shorter term construction debt from unit sales and created shortfalls in net revenue for debt service on the longer term debt owned by the funds and individuals. The result was spectacular defaults and difficult workouts for investors and sponsors.

So many investors have overestimated the demand for these facilities versus the desire by individuals to age in place in their homes. The lack of mobility in the work force which is often cited as a key dampening effect on home sales also works against these facilities in that it keeps extended families together in the same locales which facilitates aging in place. The result is to create an environment where an individual CCRC must take a larger share of the local population (the penetration rate) to create a sufficient customer base to support a given project. At the same time, tighter lending requirements have reduced the velocity of home sales. This makes it more difficult to fill beds and CCRCs thereby increasing the risk for new projects.

We are not saying that all CCRC projects are bad, only that investors be extremely diligent when selecting individual credits. Make sure that you understand that at their heart, these are real estate based transactions not health based transactions. I once worked for an institutional investor who did not understand that crucial fact. He wanted to lessen his risk of real estate exposure through land development deals and instead shifted resources into CCRCs. His resulting exposure to real estate risk at best remained static if not increased. We are also advising that investors demand a greater risk premium as an inducement to take on the risk.

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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