St. Luke’s Duluth Series 2022B Tax-Exempt Fixed Rate Bonds
Pricing Date: April 28, 2022
Settlement Date: May 12, 2022
$76,000,000 Series 2022B Tax-Exempt Fixed Rate Bonds
Objectives
With its 2022 financing, St. Luke’s Hospital of Duluth (“St. Luke’s”) sought to fund ~$70 million of new money capital needs to continue building phase 2 of its campus redevelopment plan. Given expected continuing interest rate increases, St. Luke’s opted to lock in current interest rates to avoid future market exposure.
Challenges and Opportunities
- Maintain investment grade rating based on improving financial performance and stable market share, despite continuing pressures from the pandemic, rising labor costs, and increasing leverage
- Achieve an attractive cost of capital in current rate environment ahead of expected future rate increases
- Market volatility and inflation expectations caused interest rates and credit spreads to increase rapidly in the weeks leading up to pricing
Solutions and Results
- Time to Market: Given the desire to lock in interest rates ahead of future Fed hikes, St. Luke’s moved to price Series 2022B before the May Fed meeting. With this timeline in mind, Ponder worked with St. Luke’s to develop and implement the plan of finance in only 4.5 weeks from the initial full working group call to pricing day
- Rating Agency Strategy: Ponder helped St. Luke’s successfully communicate its credit story to S&P including updates on solid market share, strong FY2021 financial performance, and the benefits of continued campus redevelopment, resulting in ‘BBB-’ rating outcome despite increasing overall leverage
- Bond Structuring: With a flat yield curve and long-lived asset availability, Ponder worked with the financing team to create an amortization schedule to wrap around existing debt service using long-dated term bonds
- Pricing Results: Given rising interest rates, St. Luke’s increased the coupon at pricing to 5.25% to generate strong investor demand. Ultimately, St. Luke’s secured a cost of capital of 5.02% (all-in TIC) on the transaction, received 3x subscription on the bonds, and was able to lower final spreads by up to 3bps
About St. Luke’s: ‘BBB-’ (S&P)
St. Luke’s Hospital of Duluth (“St. Luke’s”) is a Minnesota nonprofit corporation which includes a 267-licensed bed tertiary care hospital in Duluth, Minnesota, a critical access hospital in Two Harbors, Minnesota, and other health care facilities. St. Luke’s offers primary, secondary, and tertiary care to patients in a 17-county area in northeastern Minnesota, northern Wisconsin, and upper Michigan.
Pricing Results Series 2022B:
30 year MMD Increased 112 bps from March-April 2022:
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