Summit Pacific Medical Center officials celebrated Tuesday after finalizing the sale of $75 million of public revenue bonds, completing a timely and ambitious shift of the hospital’s funding strategy two months before a major hospital expansion project is set to break ground in January 2024.
The bond deal was signed by commissioners of the Grays Harbor County Public Hospital District #1 at a Tuesday meeting alongside hospital executives, bond lawyers and a finance consultant, who spent the last several weeks meeting with investors before selling the bonds on the public market Nov. 2.
Summit Pacific sold the bonds through Cain Brothers, a Division of KeyBanc Capital Markets Inc. Under a purchase contract with Summit Pacific, Cain Brothers agreed to sell the bonds to investors in the public bond market.
Over the course of the next 30 years, the hospital will use revenue from the expansion project to pay back the bonds, plus $114 million of interest at an average rate of 6.8%, which will amount to $189 million by the year 2053.
With an expected completion date of 2026, the expansion will add close to 30,000 square feet to Summit Pacific’s campus, including a 17,000-square-foot patient unit with 10 new beds, a 6,400-square-foot emergency department addition and a new rooftop heliport to support transfers of patients in critical care.
In an interview on Monday, Summit Pacific CEO Josh Martin called the opportunity to fund the project with revenue bonds “truly unprecedented.”
“We are officially a publicly traded company,” Martin said, referring to the sale of the revenue bonds. “There’s not many other hospitals in the country that have been able to do that.”
The commissioners’ approval sets up the hospital to close on the deal next week, at which point the $75 million of investor’s money will flow to Summit Pacific. Of that amount, $58 million is allocated to the expansion project fund, $8.5 million will refund a prior federal loan, and another $6.7 million will go to a debt service reserve fund. The bonds are exempt from federal income tax.
The hospital board gave Martin permission in April to pursue revenue bonds as a strategy for funding its proposed expansion project. That decision marked a shift from a previous plan to fund the expansion with a loan from the United States Department of Agriculture, which it used to finance construction of its main hospital and wellness center. The hospital applied again for a loan from the agency but was denied on the grounds that its financials were too favorable, forcing Summit Pacific to quickly change course.
Hospital officials began to work with financial consultants, as well as an S&P market analyst, to prepare a credit assessment for Summit Pacific. Since the hospital had never sold revenue bonds before, it was up to an independent bond committee to grade its creditworthiness on the S&P index, which investors would later use to assess potential investments.
Martin explained to the hospital board on Oct. 19, one day before going to the bond committee, that Summit Pacific — given its solid financial standing but small relative size — teetered on the fence between investment grade and non-investment grade ratings.
A rating in either category would ensure an on-time construction start for the expansion project next year, Martin said. But a higher bond rating would in theory make the hospital less risky to investors, and lock in slightly lower interest rates that could amount to a capital savings of anywhere from $5 million to $10 million in interest — the difference of about half a percentage point — over the bond’s 30-year period.
Ultimately, the bond committee decided on a non-investment grade rating for Summit Pacific. Martin said that rating presented both pros and cons for investors, who might want to capitalize on high interest rates and the chance for an improved grade in the future. Others shied away from Summit Pacific because of the shaky state of the hospital business overall. The hospital’s financial team spent the days leading up to the bond sale convincing potential investors of the sustainability of Summit Pacific’s business plan.
Two other factors presented uncertainty for hospital executives about selling the bonds in the days leading up to Nov. 2: The potential for a change in federal interest rates after a meeting of the federal reserve on Nov. 1, and the chance that other agencies might be selling competing revenue bonds on the same day.
Martin and Roy Koegen, a public finance consultant for Summit Pacific, traveled to San Francisco last Thursday to sell the bonds.
“Until you are there, you don’t really feel the weight of that decision and what a gamble it was,” Martin said.
The gamble paid off when investor offers for bonds more than doubled the amount that Summit Pacific had available to sell. Koegen said that amount of interest is unparalleled during his 49 years as a municipal bond lawyer. He called the sale “both fascinating and nerve-racking at times,” and said it was “something to be very proud of.”
Hospital commissioner Andrew Hooper said on Tuesday it has been the board’s position throughout the process to avoid asking taxpayers for a ballot measure to pay for the expansion.
“The community shouldn’t take that obligation on,” he said.
Martin said he hopes this funding strategy “paves the way for other hospitals to follow. Not every community is voting for new tax, and not every hospital has a position to do that. I’m really hoping that we could take some of these learnings, maybe promote these through good media messaging and marketing, and demonstrate a pathway to sustainability that we are in desperate need of as hospitals and rural communities across the state and the country.”
Contact reporter Clayton Franke at 406-552-3917 or firstname.lastname@example.org.