Investors May See Losses of 17% on Otherwise Safe Hospital Deal

(Bloomberg) -- Mission Health System was likely viewed as a relatively safe bet for municipal-bond investors. The not-for-profit hospital system in Asheville, North Carolina, is rated investment-grade and its revenue has climbed in each of the last five years.

But if the system’s proposed sale to for-profit HCA Healthcare goes through, investors could suffer losses under borrowing provisions that allow Mission to redeem certain debt at par in the event of a sale that changes the tax-exempt status of its bonds. And that’s likely to raise questions about whether investors will continue to accept such provisions in bond deals.

Bonds sold in 2016 by Mission maturing in 2029, one of its most actively-traded securities, were priced at a premium of about 121 cents on the dollar. If the bonds are called at par, that would equate to a 17 percent loss for bondholders. The debt last traded at an average of 110.7 cents on the dollar on June 1.

’Deeply Unhappy’

While the call provision isn’t very unusual, the Mission deal is unique because the bonds are trading above par, said Michael Johnson, a research analyst at broker-dealer firm First Ballantyne LLC in Charlotte, North Carolina. Typically, the provision is used to protect investors so they can get their money back if a deal turns taxable, he said.

"In this case, it looks as if it’s going to protect the actual company," Johnson said.

Bondholders are "deeply unhappy," said Joseph Rosenblum, director of municipal credit for AllianceBernstein, which according to Bloomberg data is a top holder of Mission’s debt.

Questions about the value of such provisions are sure to continue given that mergers and acquisitions are common in the health-care industry, Rosenblum added. "We will likely see more of these," he said. "How much are we willing to accept going forward?"

Numerous Inquiries

No decision has been made by Mission regarding how it will pay, redeem or defease its outstanding debt if the proposed deal goes through, Rowena Buffett Timms, a senior vice president for government and community relations at Mission, said in an emailed statement.

Mission has gotten "numerous" inquiries from investors on the call provisions, which were "clearly" disclosed in bond offering documents, the company said in an April 13 filing. "Mission assumes that (1) investors who purchased any of these bonds were aware of such call provisions and (2) the purchase price or yield at which such investors purchased these bonds (either at the initial offering or in the secondary market) reflected the redemption risks relating to such call provisions," the filing said.

Even if a sale to HCA doesn’t go through, Johnson said Mission’s bond prices are unlikely to improve given that the call provision will remain an issue, Johnson said.

"It’s already proven it’s up for sale," he said.

©2018 Bloomberg L.P.

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