Primary disclosure ramps up as borrowers assess COVID-19 pain


Recent not-for-profit healthcare and higher education disclosure on COVID-19 is providing a more stark picture of the fiscal and operational hardships posed by the intensifying pandemic.

A look at a series of recently sold and pending Midwestern deals highlights how disclosure is ramping up in some bond offering documents as borrowers begin to feel the disease’s impact.

Cincinnati-based UC Health devoted a stand-alone section, “Potential Impact of COVID-19,” in the table of contents on its upcoming $278 million offering just ahead of “Bondholders’ Risk” published Friday.

UC is treating COVID-19 patients and is facing rising expenses while elective procedures are on hold. In response to potential liquidity challenges, UC Health said it has requested an increase in its $25 million line of credit to $75 million but it tells investors there’s no “guarantee that such approval will be received” and it can’t yet fully determine the “full impact of COVID-19 and the scop of the adverse impact on UC Health’s finance and operations.”

An idle Covid-19 drive-thru testing area stands in a parking lot outside Advocate Good Shepherd Hospital in Barrington, Illinois, U.S., on Monday, March 23, 2020

St. Louis-based Ascension, one of the largest not-for-profit healthcare systems in the nation, laid out a series of risks posed in a reoffering statement on a $96 million transaction that includes growing concerns over the impact of investment losses and market access.

More is known now than just a week ago, said one trading source. “If you know something you don’t want to not disclose it,” the source said. “You also don’t want to look around and see that others are disclosing more or give investors any reason to walk away” before settlement date.

“Everybody is learning and more information is coming out so that’s clearly one of the big disclosure challenges right now as there is so much uncertainty,” said Eric Jordahl, a managing director at Kaufman Hall, which is advising UC Health. “I think everybody is trying to be conscientious and anticipatory. In some places, the disease has not shown up so the disclosure is more generic about the potential disruption but some can be more description about their experience” like UC Health “but it’s still hard for organizations to understand what the full financial implications have been or will be.”

Timing remains up in the air, with the UC ready to price “when the market starts functioning properly,” the trading source said of the liquidity-driven market volatility that led to price and spread shocks as investors pulled cash from the market and pushed deals to the day-to-day calendar. “There are so many deals backed up, it’s like being on a runway and you want to ready to execute when the market opens up.”

Federal Reserve and Congressional stimulus will help, but the “uncertainty” of the disease’s trajectory will remain. “It’s a sector-by-sector review investors are conducting,” the source said. “The first question a healthcare provider might get is ‘are you treating’ any COVID-19 patients so the uncertainty remains until we know more” about the trajectory, an expected surge, vaccines, or treatments.

When deals begin pricing, the source said he expects participants will consider shortening settlement durations. “If you wait 30 days there may be more disclosures and there are more counter-party risks. What if a buyer loses liquidity or goes out of business? Things are changing so rapidly,” the source said.

For Kaufman Hall’s healthcare clients “identifying liquidity sources” is a top priority and as deals remain on the sidelines “everything is under consideration” on structuring including private loans and placements, Jordahl said.

UC lays out the history of the outbreak dating back to origins in Wuhan, Hubei Province in December to Gov. Mike DeWine’s declaration of a state of emergency March 17 cancelling non-emergency elective surgeries and procedures in anticipation of a surge of patients, an action that will “materially impact UCHealth’s operating revenues,” the offering statement reads.

In addition to revenue and expense blows, UC warns that its investments have “declined significantly in recent weeks.” The growing outbreak that’s driven market turmoil with a primary market calendar stunted by outflows and skyrocketing yields could also adversely affect the “secondary market for and value of the Series 2020 bonds.”

UC said it is currently monitoring and/or examining a number of potential COVID-19 cases and has confirmed and treated some cases. With that comes the potential inability to serve all patients, a temporary shutdown, and cause harm to personnel. The system has business interruption insurance that includes coverage for communicable disease impacts, but the extent to which coverage would be available related to the outbreak is “uncertain and dependent” on the circumstances.

UC Health is the only academic medical center in Cincinnati and the primary teaching hospital for the University of Cincinnati. The new-money proceeds will fund a variety of capital projects including a new emergency department and tower at UC Health’s flagship campus.

The system is selling through Hamilton County. RBC Capital Markets and JPMorgan are senior managers. Kaufman Hall is advising the system and Thompson Hine LLP is bond counsel.

Ahead of the sale, Moody’s Investors Service downgraded the system’s rating one notch to A3 and assigned a stable outlook. S&P Global Ratings affirmed the rating at A but revised its outlook to negative.

“UC Health’s credit profile reflects a shortfall to expected performance in fiscal 2019 and expectations the operating cash-flow margins will be moderate and below historical levels over the next several years,” Moody’s said.

S&P said the move to a negative outlook reflects the system’s current liquidity levels and leverage. The rating agency did not raise red flags over the system’s ability to manage the outbreak. “We believe UC Health’s credit fundamentals, as the sole academic medical center, should help support the credit over the medium to longer term,” S&P said.

Because it’s a reoffering, the statement references an October bond document from Ascension Senior Credit Group but it makes a series of amendments, including several related to COVID-19 and others related to healthcare reform, drug pricing, and patient service revenues.

Ascension devotes a section under “Bondholders’ Risks” to include “Market Turmoil” and adds a new section “Infectious Disease Outbreak and COVID-19” under “Other Risks.”

In addition to the warnings over the uncertainties of the impact on finances and the various actions that could hurt revenues and add to expenses, the reoffering statement addresses municipal market issues too. “Access to capital markets may be hindered and increased costs of borrowing may occur as a result. Given the uncertainty regarding the outbreak, the full range of its consequences cannot be predicted at this time,” it reads.

The reoffering through the Michigan Finance Authority moves the debt to a long-term interest period. Ascension carries AA-plus ratings from Fitch Ratings and S&P Global Ratings and a Aa2 from Moody’s Investors Service.

Several other Midwestern-based deals remain on the day-to-day calendar made more limited information disclosures in their documents that posted in February or earlier this month underscoring how the situation is evolving rapidly and borrowers with more information are now disclosing it.

Cincinnati-based TriHealth Obligated Group in its offering statement published March 10 offered a broad reference to COVID-19 under the Infectious Disease Outbreak category listed among “Other Risk Factors.” Like other offering documents from last month or earlier this month, it notes the potential for supply-chain disruption, the potential for higher supply and staffing costs, and the potential shutdown of facilities due to treatment of patients or diversion of patients.

The $195 issue is selling through Hamilton County and remains on the day-to-day calendar. BofA Securities is the lead manager. The system has about $675 million. The system’s obligated group includes Bethesda Hospital, Inc., TriHealth Hospital, Inc., TriHealth Physician Enterprise Corp., TriHealth G, LLC, and Bethesda Healthcare, Inc. The deal incorporates McCullough-Hyde Memorial Hospital into the group.

S&P affirmed its A-plus and Fitch affirmed the system’s AA-minus ratings. The outlook for both rating agencies is stable.

Washington University’s $300 million taxable sale through the Missouri Health and Educational Facilities Authority list “Infectious Disease Outbreak” under “Risk Factors.” The university outlines how on March 11 it decided to extend spring break and then move to an online instruction from in-person classroom instruction for the remainder of the semester.

The university warns of a hit to its investments due to stock market turmoil, damage to its bonds’ secondary market trading value and other factors that “may adversely impact institution finances and operations” with risks to enrollment, student appeal, and a decline in housing.

The university covers the market volatility on investments as a general disclosure that doesn’t reference COVID-19. The university made an endowment distribution of $341 million in 2019, accounting for 9.6% of operating revenue, but going forward distributions depend on the market value and investment returns.

Proceeds from the issue will provide initial funding for the construction of the new Neuroscience Research Facility at the university’s medical campus with a portion advance refunding 2011 bonds. Moody’s affirmed the school’s Aa1 rating. S&P rates the university AA-plus. Wells Fargo Securities and Morgan Stanley are the senior managers. Bankers said if the market stabilizes the deal could price this week.

Cincinnati University on March 17 published a supplement to its March 3 final offering statement on a $102 million sale with a new addition on “Potential Impact of COVID-19” added under “Investment Considerations.” It outlines the suspension of face-to-face instruction and shift to remote instruction when possible following an order from the governor. Room and board is being refunded on a pro rata basis.

The University of Chicago jumped into the market the week March 9. It opted not to include any COVID-19 disclosure in its preliminary offering and did not supplement its March 16 final statement with any disclosure. Several higher education deals that priced earlier in the month also did not report any COVID-19 disclosures.

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