Mission Health’s handling of its municipal debt is becoming a growing headache for the North Carolina system, which is in negotiations to be purchased by HCA Healthcare.
The system’s plan to call debt it issued a little more than a year ago at a significantly lower price than it was sold for has investors in the debt crying foul, even if Mission is following the terms of the offering statement for the $100.3 million in borrowing.
Asheville-based Mission’s July 2017 issuance was sold in August 2016 without fanfare.
But because it set the coupon on the debt at 5%, the bonds were priced at a premium of 104.4 to 122.4, yielding $18.7 million above par. Mission plans to call the bonds back as part of its sale to HCA at a cool 100, meaning Mission or its buyer keeps the difference.
After the announcement of its plans, the bonds have since lost up to 15% of their value, and investors are skeptical.
One of them, Joseph Rosenblum, director of municipal credit research for the asset management firm AllianceBernstein, said he has a lot of unanswered questions. Chief among them is when Mission began its negotiations with HCA.
“There was a long process in there between the time we looked at the bonds to the time the bonds were delivered much later,” he said, “and then just shortly after that, the announcement that the system is selling itself to the for-profit. I’m raising the question of, ‘What was the timing of all of that?’ I’m unsure. All I can say to you is bondholders are pretty unhappy.”
According to a written statement from Rowena Buffett Timms, Mission Health’s senior vice president of government and community relations, at the time the bonds were offered and sold, Mission was not having any material discussions with HCA or any other healthcare entities related to specific mergers or acquisitions. Mission signed a letter of intent with HCA in March of this year, which the health system pointed out was well after the offering and sale of the applicable bond series.
Rosenblum said investors are not only upset with Mission, but with the North Carolina Medical Care Commission, which issued the bonds on Mission’s behalf. In the past, he said he’s observed North Carolina’s state regulators taking a more hands-on approach to bond issuances, but that doesn’t appear to be the case here.
In the future, Rosenblum said he’ll approach municipal bonds in North Carolina “with a little bit more skepticism.”
Kelly Haight, a spokeswoman for the North Carolina Department of Health and Human Services, which includes the commission, said the commission is merely a conduit issuer, and does not specify call provisions included in the bonds.
Mission said the bonds’ offering prices, coupon rates and yields were dictated by the underwriters it hired to sell the bonds, not by Mission or the commission, which “only accepted and approved the coupon rates and offering prices and yields offered by the underwriters,” Buffett Timms wrote in a June 12 statement.
Most municipal bonds contain provisions that allow issuers to redeem them before their final maturity date, usually 10 years. They also commonly contain extraordinary redemption provisions that allow the bonds to be redeemed in the event property is damaged—a hospital burns down, for example—or if a law change renders the project unfeasible. Mission’s 2017 series included both, that allow it to redeem its bonds at par under those circumstances.
Mission’s 2017 series also contained a provision that allows Mission to redeem the bonds at par if the health system is purchased or merges and does not take action to make its bonds taxable.
That latter so-called “taxability” clause is what caught bondholders off guard, as the sale of a not-for-profit health system to a for-profit entity is relatively unusual, said Bill Oliver, industry and media liaison with the National Federation of Municipal Analysts. Taxability call provisions are more common in corporate-backed bond deals, but less common among not-for-profit healthcare providers, he said.
The situation will likely cause investors to be more cautious about the redemption provisions for all types of bonds, especially if they are originally issued at premiums.
“It isn’t until you get burned like this that you start looking for something like this the next time,” Oliver said.
In response to a flood of questions from investors about how Mission plans to handle the situation, Mission said the call provisions were “
clearly and full disclosed” to investors. The health system also said it has included the special tax call provision in its tax-exempt, publicly offered bond deals since 1998. Some of Mission’s top bondholders, according to Bloomberg, include TIAA, Franklin Templeton Investments, AllianceBernstein, Vanguard and BlackRock, who likely are managing on behalf of individual investors, many of whom likely live in North Carolina.
Even if Mission’s deal with HCA doesn’t ultimately take place, Oliver said the bonds are unlikely to regain their value, since the possibility of a merger would still exist.
“At that point, the market is going to be suspicious,” he said.
Meanwhile, HCA
issued bonds on Aug. 23 from which the hospital chain said it intends to generate net proceeds of nearly $2 billion, a portion of which will go toward “general corporate purposes, which may include acquisitions.”
Julie Henry, a spokeswoman for the North Carolina Healthcare Association, wouldn’t say whether the current situation could affect the success of future bond issuances by not-for-profit hospitals in the state.
“There are many factors that affect bond issuances, particularly in today’s volatile healthcare environment, so it is difficult to speculate on the impact of one acquisition on the rest of the state,” she wrote in an email. “We are fortunate to have well-managed public and private hospitals in North Carolina making long-term investments in their communities to improve our state’s economic health and the health of our citizens.”
