As Lehigh Valley Health Network settles into the offices of Schuylkill Health System in Pottsville, it decided to refinance more than $45 million of Schuylkill Health’s debt.
The City of Pottsville Hospital Authority approved Lehigh Valley’s request on Nov. 3 and the city council will review and may vote to approve it at its next meeting, scheduled for 6 p.m. Monday.
Schuylkill Health has two outstanding bond issues, a 2014 bond issue of $29,765,000, and a 2016 bond of $20,000,000.
“The full amount of principal on each is owed because the time for the first scheduled principal payments on each of the 2014 and 2016 bonds is at a future date,” David H. Rattigan, Pottsville, the solicitor for the hospital authority, said Nov. 3.
The interest rate on the 2014 bond is “between 5 and 6 percent” and the interest rate on the 2016 bond is 5.25 percent, Edward O’Dea, the executive vice president of finance and the chief financial officer for Lehigh Valley Health Network, Allentown, said Nov. 3.
Lehigh Valley is hoping to refinance the bonds with an interest rate that is “a little above 3 percent,” O’Dea said.
On April 14, Schuylkill Health and Lehigh Valley Health Network announced they had signed an agreement to merge.
Lehigh Valley Health Network includes five hospital campuses in Lehigh and Luzerne counties: Lehigh Valley Hospital-Cedar Crest, Lehigh Valley Hospital-17th and Chew streets, and Lehigh Valley Health Network-Tilghman, all in Allentown, Lehigh Valley Hospital-Muhlenberg, Bethlehem, and Lehigh Valley Hospital-Hazleton.
Schuylkill Health managed two hospitals in Pottsville, and with the merger they were renamed.
Schuylkill Medical Center–East Norwegian Street became Lehigh Valley Hospital–Schuylkill E. Norwegian Street and Schuylkill Medical Center–South Jackson Street became Lehigh Valley Hospital-Schuylkill S. Jackson Street.
“The terms of the refunded bonds is expected to be more favorable to the group than the terms of the existing Schuylkill Health System bonds,” Kevin R. Cunningham, Philadelphia, said at a public hearing on the refinancing held just before the authority’s meeting Nov. 3 at city hall.
Cunningham said his firm, Ballard Spahr LLP, is the bond counsel for the City of Pottsville Hospital Authority.
“How are they more favorable?” asked Michael Muncy, the authority’s vice chairman.
“It’s because of credit rating. The Schuylkill Health System is now part of a larger system that has a well-regarded credit rating from the bond rating agencies,” Cunningham said.
“Part of the benefits, frankly, of the merger of LVHN with Schuylkill was to have opportunities to gain some cost efficiencies. One of them is in the terms and conditions of borrowing money,” O’Dea said at the hearing.
“At the time those bonds were issued, Schuylkill Health System was unrated. Schuylkill Health System’s financials didn’t provide them an opportunity to get a rating. So those bonds were issued at very minimal terms. It’s not uncommon for small community hospitals which don’t have the means to do more than that. So the rates on those bonds are anywhere between 5 and 6 percent. Those are extraordinarily high in today’s environment. Those are typical for a non-rated organization. But the rates we’ll get by refinancing with LVHN’s credit are going to be around 3 percent, or maybe a little less than 3 percent. So this can be a significant financial savings for the community, frankly, because that interest cost is coming out of Schuylkill, and those savings will accrue here. They won’t be taken back to Lehigh Valley,” O’Dea said.
“We’re not borrowing any additional money. We’re taking advantage of terrific market opportunities right now. As you know, interest rates are extremely low,” O’Dea said.
Authority members present were: Muncy, Christina M. DiCello, Joanne Hively, Diana Gabardi, Judy Schweich and Joseph Brahler.
Absent were George F. Halcovage Jr., the authority’s chairman; and authority members Heidi Eckert and Susan Jochems.
Also present were Rattigan and Edward A. Fedok, Allentown. Fedok’s firm, Stevens & Lee, is the general counsel for the Lehigh Valley Health Network.