HOSPITAL ASSET TRANSFORMATION USED FOR THE FIRST
TIME TO KEEP CENTRALIZED ACUTE-CARE IN PASSAIC

(Trenton) The Hospital Asset Transformation Program ("HATP") was enacted in 2000 to create a financing vehicle through which the Authority and the State could team up to help hospitals that need to terminate services at certain locations. On April 11, 2007, the program was used for the first time to solve a hospital crisis in Passaic.

Under the HATP, the Authority can issue State-backed bonds to refund the outstanding bonds of a hospital that, meeting certain pre-set criteria, will terminate acute care services at a location where they are no longer useful.  The financial support from the State is, of course, subject to the approval of the State Treasurer and subject to appropriation by the legislature.

The city of Passaic was previously served by three hospitals that found themselves in financial strife, largely due to over bedding in the Passaic market.  In 2003, Atlantic Health System decided to leave the competition and sold its facility, The General Hospital Center of Passaic, to the Beth Israel Hospital Association of Passaic ("PBI"), another of the three local hospitals.  PBI then sold its own facility to be used for a new public school. 

Unfortunately, PBI continued to struggle in the new location, suffering from insufficient admissions.  In 2006, PBI filed for bankruptcy.

St. Mary's Hopsital, the third acute care hospital in Passaic, though located more on the outskirts of the city, was interested in buying and relocating to the centralized site of PBI.  Unfortunately, St. Mary's, too, suffered long as a result of the competition, and was in a weak cash position to acquire the facility.

Threatened with the prospect of leaving the city of Passaic without a centralized acute-care hospital, the Governor's Office, the Authority, the Department of Health and Senior Services, and the Treasurer searched for solutions.  Enter the HATP.  Because St. Mary's would be closing its current facility upon relocating to the PBI site, and because it fit the other required criteria, St. Mary's was eligible for the program.

Further complicating the situation, however, was the timeline in which PBI needed to sell its facility according to dates established by the bankruptcy court.

In order to accommodate the compressed timeline, the Authority authorized a private placement of Interim Bonds on behalf of St. Mary's in February of 2007, issuing the bonds with the expectancy that the Interim Bonds would be refunded through the issuance of the HATP bonds, which were still being structured at the time.  The Interim Bonds were privately placed with Merrill Lynch, who would serve as the senior managing underwriter for the HATP bonds.

The proceeds of these Interim Bonds were used to: finance the acquisition PBI in an amount of $36.7 million, from which PBI could pay off its outstanding Authority debt (approximately $22 million of bonds and a $5 million debtor-in-possession loan).  The proceeds also refunded $7.4 million of St. Mary's own outstanding Authority bonds.  Most importantly, the Interim Bonds allowed PBI to meet its required deadlines and enabled St. Mary's to finalize the acquisition, which was completed on February 28th.

As expected, on April 11th, the Authority successfully closed on two long-term series of refunding bonds, totaling $45,425,000, issued on behalf of St. Mary's using the HATP.  The bonds include a $26,970,000 tax-exempt series with a final maturity of March, 2027 and a $17,420,000 taxable series with a final maturity of March, 2018.  

Based on New Jersey's ability to issue State-appropriated bonds, both HATP series received an "A+" rating from Fitch, "A1" from Moody's and "AA-" from S&P.  The encouraging ratings helped to yield a low combined all-in true interest cost of 4.77%.

It should be noted that St. Mary's entered into an agreement to pay an amount equal to the principal and interest on the bonds, therefore, the HATP bonds will be revenue neutral to the State.

Mark Hopkins, Executive Director of the Authority, complimented all parties for the laborious effort required to make the transaction a success, including Merrill Lynch, bond counsel Cozen O'Connor, the Authority staff, the Governor's office, the Department of Health and Senior Services, and the Treasurer's and Attorney General's offices. "The entire working group did an exceptional job on this incredibly complicated, work-intensive and fast-paced transaction," he said.

Of course, far beyond the satisfaction of a successful bond transaction is the encouraging outset of St. Mary's operations at the new site. Following a smooth transition to its new facility on March 1st, the new St. Mary's location has been operating at or near capacity since the move, averaging approximately 220 filled beds.  Prior to the transition, PBI filled on average 120 beds and St. Mary's averaged approximately 80.

The NJHCFFA is the primary issuer of municipal bonds for New Jersey's health care organizations. During its 30+-year history, the NJHCFFA has issued over $12 billion in bonds on behalf of over 140 health care organizations throughout the state.

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