Joseph Krist

Publisher

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ISSUE OF THE WEEK

$447,200,000

Tarrant County (TX) Cultural Education Facilities Finance Corporation

Revenue and Refunding Bonds

Moody’s: A1

CHRISTUS is a Catholic not-for-profit health system. The system owns and/or operates facilities in four states in the United States (Texas, Louisiana, Arkansas and New Mexico), and in Mexico, Chile and Colombia. The health care facilities owned and operated by members of the system include general acute care hospitals, long term care facilities, skilled nursing and nursing home facilities, and clinics with an aggregate of 5,963 available beds (1,534 of which are located in Mexico, Chile and Colombia), as well as independent facilities for the elderly with an aggregate of 251 units (all figures as of June 30, 2018). Texas operations account for nearly 71% of revenue, 15% Louisiana, 9% New Mexico and 5% Latin America. The largest market as measured by both bed count and revenue base is Northeast Texas which includes recently acquired Trinity Mother Frances and Good Shepherd Medical Center.

The bonds are secured by a pledge of the obligated group members’ gross revenues, including their respective accounts receivables and receipts, as defined in the bond documents. The obligated group members include: CHRISTUS Health Northern Louisiana, CHRISTUS Health Central Louisiana, CHRISTUS Health Southeast Texas, CHRISTUS Health Ark-LA-Tex Health System, CHRISTUS Santa Rosa Health Care Corporation, CHRISTUS Spohn Health System Corporation, Mother Frances Hospital Regional Health Care Center, The Good Shepherd Hospital, Inc., CHRISTUS Good Shepherd Medical Center and Good Shepherd Health System Inc.

The bonds will provide some funding for future capital improvements but the majority of the proceeds will refinance bank lines, construction financing, and some existing debt. The financing also allows for the amendment of the Master Trust Indenture  securing the debt. These amendments include a change in the amount of bond holders required to request acceleration of debt in an event of default (from 25% to 50%), a change in the number of years the system must be below a 1.0x debt service coverage (from 1 year to 2 years) to constitute an event of default, and a restatement of the definition of “expenses” that removes non-cash items related to the pension plan. Additional financial covenants that remain unchanged include a 75 days cash on hand, 65% debt to capitalization, and 1.0x MADS.

The rating outlook was lowered to negative from stable. The change was based on a view of higher proforma leverage and the absence of a longer track record of sustained operating improvement to support incremental debt. Moody’s warned that an  inability to generate further cash flow improvement and at least maintain proforma liquidity levels could result in a downgrade.

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FOREIGN CHEMICAL MAKERS BENEFIT FROM TAX EXEMPT BONDS

Rates are in the midst of their upward adjustment in the face of aggregate data pointing towards a booming economy. Many perceive the end to be closer than the beginning so those among them desiring to lock in more favorable borrowing costs on outstanding debt. This would be especially true for businesses requiring favorable cyclical turns in the economy to support the debt.

So on the basis of all these factors we are not surprised to see some of the more exotic projects and credits take their shot at a municipal refinancing. Should the initial signs portend a trend, the upcoming refinancing for the Mission (TX) Economic Development Corporation. The debt to be issued will refinance construction debt which built a 5000 ton per day methanol production facility.

The market for methane and its role in the development of fertilizer give producers access to their products on a global scale. Much of the primary production infrastructure is owned by non-US companies. The significant growth in the market for methane and its derivatives is occurring in China. Given the current Administration attitude has been toward trade in general and China in particular, this raises a risk long-term.

The reliance of the end market for many if not all methane based products is commercially and industrially driven produces a cyclical risk to changes in regional and global economies. This plant was built in a period of favorable  market trends however, operations only commenced in April of this year. Plant economics would seem to depend on those metrics remaining positive.

There are also issues which raise concerns among the socially minded or oriented investors prior financings in the large scale fertilizer production industry. those concerns range from safety related to political. The perceived safety image associated with the production of volatile yet highly demanded chemical products gives others pause. There has even been a national security concern on the part of some investors. Much of the production and demand for chemicals comes from the politically volatile Middle East. The corporate entities which produce and market their product are subject to a higher than typical level of scrutiny which has in the past raise concerns about the ultimate end buyers for these products. These concerns have worked against regulatory approval and/or public support for these facilities.

PUERTO RICO

Luc Despins was hired by the island’s fiscal oversight board to negotiate a settlement between commonwealth bondholders and those holding COFINA debt. Recent comments by Mr. Despins may have complicated efforts to reach a consensual settlement in the dispute between the parties. After months of litigation and mediation, on June 5, 2018, Despins and COFINA’s agent executed an agreement in principle to resolve their respective party’s dispute, in which each side agreed to share sales and use tax revenues.

Now Mr. Despins is challenging the authority of the oversight board to file a motion seeking approval of its settlement of the Commonwealth-COFINA Dispute. The agent says that the board’s move to revised the May 30 fiscal plan’s long-term projections “materially downward” in connection with another certification of the fiscal plan on June 29, 2018 “renders a settlement along the lines of the Agreement in Principle neither feasible nor desirable.”

Understandably, the COFINA bondholders are upset with the Agent’s move. “While it’s disappointing the Commonwealth Agent is looking to delay the very deal it negotiated and filed with the Court, we hope for the sake of the island the path to plan confirmation will be speedy and efficient. The Agent cannot dictate to the congressionally-established Oversight Board and the democratically-elected government how and when to settle its debts and free up its sales taxes from ongoing litigation.”

While the scale of the default and potential settlement are huge, politics would seem to be an even greater hurdle. This was one of the great concerns overhanging any potential settlement process. The oversight panel also announced it certified, by unanimous consent, a revised fiscal plan for COFINA.  COFINA’s is the first adjustment plan submitted in the debt restructuring process under Promesa, and “covers the totality of the $17.6 billion in COFINA debt, which in turn represents 24% of the total of Puerto Rico’s bonded debt to be restructured,”

The fiscal board has said the terms agreed to by the parties, now contained in this Plan of Adjustment, provide for more than a 32% reduction in COFINA debt, gives Puerto Rico approximately $17.5 billion in debt service savings, enables local retail bondholders in Puerto Rico to receive a significant recovery and paves the way for achieving a consensual restructuring of COFINA debt by the end of 2018.”

BIG CATHOLIC HEALTH MERGER RECEIVES VATICAN BLESSING

The merger and acquisitions sector takes potential regulatory approval requirements as standard operating procedure as a part of that process. In the tax exempt  sector, the religious orientation of some entities primarily hospitals introduces some unique “regulatory” hurdles into the approval process. The latest example of this is the pending CHI-Dignity Health merger for which a definitive agreement was announced last November. When it was announced, the Archbishop of Denver issued a list of six conditions which must be met in order for the merger to be approved. The “nihil obstat”  (Latin for nothing stands in the way) outlined six conditions be met to ensure that CHI would not be cooperating with any “morally illicit” procedures as part of the deal.

One of those conditions was that the proposed merger be reviewed by the Vatican’s Congregation for the Doctrine of Faith. That review and approval has been delivered. As a result, the Archbishop announced that as long as the other five conditions continued to be met, his nihil obstat will no longer be considered conditional.

The remaining hurdles primarily consist of state regulatory approvals. One can argue as to which is the “highest authority” overseeing the merger but the Vatican approval was likely the highest hurdle to overcome. In the meantime, Dignity’s 15,000 unionized employees have reached and ratified new labor agreements settling issues of pay (13% raises spread over five years, a 1% bonus in the second year, and insurance (they will maintain their defined benefit pension).

HURRICANE IMPACT ON STATE FINANCE

In the wake of Hurricane Florence, North Carolina has enacted the 2018 Hurricane Florence Disaster Recovery Act. The Act will provide aid to local governments and public higher education institutions. The entities will receive state aid to help pay for recovery costs related to Hurricane Florence The state spending package will cover hurricane recovery costs not covered by federal aid or private insurance.

The immediate impact on the state’s finances have become clearer. A total of $756.5 million will be transferred to the Hurricane Florence Disaster Recovery Fund from the state’s rainy day fund, reducing the fund’s projected balance at the end of fiscal 2019 to $1.3 billion from $2.0 billion. The remainder of the $850 million allocation will come from other various state funds, including $65 million from the highway fund. North Carolina’s $850 million allocation is equal to approximately 3.6% of the state’s fiscal 2019 (ending 30 June 2019) general fund budget.

These expenditures are not seen as having long term negative impacts on the State’s finances. Of the $454.9 million appropriated thus far, $60 million has been allocated to the Department of Public Instruction, which will benefit public K-12 schools. The package also allocates about $30 million for the University of North Carolina (UNC) system campuses most affected by the hurricane: UNC Wilmington (Aa3 stable), UNC Pembroke and Fayetteville State University. The universities anticipate that the state’s $30 million, along with insurance coverage and FEMA assistance, will cover a significant portion of damage at each campus. UNC Wilmington, which was closed to students for about four weeks, is likely to receive the largest share of these funds given the extent of the damage to its campus, which is currently estimated to be $140 million.

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