To raise construction funds primarily for Mayo Clinic’s expansion and upgrade of Mayo Clinic Hospital — Saint Marys, the City of Rochester is issuing $200 million in tax-free bonds in October.
This is the latest of about $1.8 billion in bonds the city has issued for Mayo Clinic in the last nine years. Mayo Clinic has issued another $1.8 billion in bonds directly between 2006 to 2016.
This latest round of bonds will be used to "finance a portion of the project consisting generally of the payment of or reimbursement to Mayo Clinic for the costs of construction, renovation and equipping of various Mayo Clinic buildings and facilities throughout the city, including without limitation the Saint Marys modernization and growth plan, consisting of expansion of the Generose building, operating room capacity, renovation and expansion of the neonatal and pediatric intensive care units, increase in ICU beds and other improvements and equipment purchases, the payment of capitalized interest and the payment of certain costs of issuance of the bonds."
A 220-page preliminary offering memorandum for potential investors was filed this week.
The bonds are being offered in denominations of $5,000 "and integral multiples thereof. …" Starting on May 15, 2019, interest on the bonds is payable every May 15 and Nov. 15.
The final maturity date for the bonds is Nov. 15, 2045.
Rochester last issued bonds for Mayo Clinic in 2016, when it made issues of $200 million and $75 million.
The city is not liable for the bonds and is allowed to issue such bonds to finance health care construction projects. Rochester has also issued bonds for Olmsted Medical Center and The Homestead projects.
The current offering document states that Mayo Clinic intends to spend $790 million for capital expenditures in 2018, though that number will climb to an average of $1 billion a year from 2019 to 2022.
At a time when revenue and donations are up, as well as returns on investments, why is Mayo Clinic choosing to finance its projects through selling bonds?
"The wise use of leverage — debt financing with bonds — is a key contributor to financial stewardship and stability. Bonds represent a low-cost source of funds for large-scale capital projects and help us preserve self-generated cash for routine and recurring needs such as equipment replacement and pension contributions," Mayo Clinic spokeswoman Heather Carlson Kehren said. "Mayo’s use of leverage is comparable to other similar organizations and is supported by our recently affirmed ‘AA’ rating from Standard and Poor’s."
The financial research and ratings firm described the reasoning behind giving Mayo Clinic such a high rating.
"The rating affirmation and assignment are based on several factors, including the health system’s dominant market position, global reputation, solid financial profile and diverse operating assets," according to the Standard & Poor statement. "The outlook is stable, reflecting S&P’s expectation that Mayo Clinic’s stellar enterprise profile will be maintained to improve margins."
To enhance its "self-liquidity," Mayo Clinic reports that it has four separate lines of credit — $100 million with Wells Fargo Bank, $200 million with the U.S. Bank National Association, $100 million with the Bank of America and $25 million with the Northern Trust Co.
The bond memorandum also included detailed financial information for Mayo Clinic.
It showed revenue for the first six months of 2018 was $6.2 billion, up from $5.8 million for the same time period in 2017. Revenue for 2017 was $11.99 billion, up from $10.99 billion in 2016.
The payer mix for the first six months of 2018 was 46.7 percent from Medicare, 8.5 from Medicaid, 35.9 percent from contract and 8.9 percent from self pay.
That shows a slight increase in Medicare from the first six months of 2017, when Medicare accounted for 45.2 percent of the payer mix. The percentage of self pay decreased slightly in 2018 from 10.2 percent in during the same six months in 2017.
Does Mayo Clinic expect to continue issuing bonds often in the coming years?
"Mayo has no immediate plans for future bond issues soon, but it is likely we will issue additional bonds in the future for both new capital projects and to refinance existing bonds from time-to-time," stated Carlson Kehren.