Kaufman Hall Advises Fairview Health Services on Securing Long-Term Capital through Taxable Private Placement

On September 2, 2015, Fairview Health Services in Minneapolis, MN (A2/A+/NR, all stable) closed on a $352 million taxable private placement; Kaufman Hall served as financial advisor and Citi and RBC Capital Markets served as joint placement agents. This was only the third completed transaction for a nonprofit health care borrower in this market, following North Shore LIJ (NY) in 2014 and St. Charles Health System (OR) earlier this year. 

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The taxable private placement market is an attractive funding channel for borrowers who are seeking taxable capital at competitive pricing levels. The investor base predominantly consists of life insurance companies who are seeking long-duration high quality assets to serve as hedges for their future insurance obligations. In contrast to the taxable public markets where bonds with ‘benchmark’ maturities in 5, 10 and 30 years are most common, borrowers in the private placement market can get strong execution and attractive pricing for amortizing structures, which are less interest rate sensitive than single maturities, and preferred by private placement investors.

Although the taxable private placement is very large and accessed by a wide range of corporate borrowers, the investor base was not as familiar with the U.S. healthcare sector and even less familiar with non-profit health systems. A large marketing effort was necessary to educate investors on the nuances of investing in a healthcare company like Fairview, which includes an academic medical center, community hospitals, a large pharmacy business, physician groups and an insurance arm (structured as a joint venture). Fairview management conducted a two-day roadshow, targeting insurance companies in New York City, Hartford and Columbus and hosted multiple one-on-one phone calls and answered numerous investor questions.

The bonds price as a single term bond, with sinking funds, at a credit spread to an interpolated U.S. Treasury rate equal to the average life of the amortization. In Fairview’s case, its private placement priced at a spread of 1.65% to an interpolated 15.5 year U.S. Treasury Bond, which resulted in a 4.16% taxable interest rate for the 28-year structure. In total, Fairview received over $900 million in orders from 15 investors, relative to $352 million of identified financing needs. This level of interest allowed Fairview to tighten the spread from the initially proposed level of 1.70%. It is important to note that Citi and RBC served as ‘placement agents’ and not as underwriter, executing the transaction on a ‘best-efforts’ basis.

Kaufman Hall served as financial advisor to Fairview throughout the financing process – interviewing investment bankers, framing key decisions around plan of finance components, evaluating different financing products, supporting rating agency and investor communications and providing up-to-the-minute market insight and pricing support.

To learn more about how Kaufman Hall is advising healthcare providers on debt transactions, please contact Managing Director Eric Jordahl and Vice President Matt Robbins at 847.441.8780 or ejordahl@kaufmanhall.com and mrobbins@kaufmanhall.com.