Mayo Clinic’s sale of $500 million in taxable bonds will provide a boost as the clinic adjusts its financial strategy and prepares for expected capital spending of $6.5 billion for the next five years combined.
A 232-page memorandum for potential investors was filed on March 23 for the bonds in denominations of $1,000 or “integral multiples thereof.” Starting on May 15, 2019, 3.196% interest on the bonds is payable every May 15 and Nov. 15.
It’s unlikely that individual local investors will end up with any of these bonds.
“One hundred percent of the bonds were sold to investors on March 23, with closing — the actual transfer of funds — on April 1. Most of the investors plan to hold these Mayo Clinic bonds in their portfolios, so it is unlikely that the general public will have an opportunity to purchase them on April 1,” said Mayo Clinic Chief Financial Officer Dennis Dahlen.
The issuance cost $2.49 million, so the net benefit to Mayo Clinic is $497.5 million.
Large bond sales are not unusual for Mayo Clinic.
Since 2006, it has raised $2.3 billion, including this round, from the direct sale on bonds. It has also raised $1.8 billion by working with the City of Rochester to sell tax-free bonds in the past 10 years.
However, this bond sale is more than twice the size of recent ones.
In 2018, the City of Rochester issued $200 million in bonds, with the proceeds earmarked for construction, primarily for Mayo Clinic’s expansion and upgrade of Mayo Clinic Hospital-Saint Marys Campus.
This $500 million bond sale is different, because Mayo Clinic is not designating it for a specific project.
“The specific uses of the net bond proceeds have not been determined, but debt financing is a routine element of Mayo Clinic’s capital formation," stated Mayo Clinic spokesman Jay Furst. “Debt financing is a routine element of Mayo Clinic’s long-term financial planning, and the current rate environment makes it an opportune time to issue bonds.”
The bond issue documentation does include notice that Mayo Clinic has large capital expenditures in the pipeline.
In 2019, Mayo Clinic spent $723 million in capital expenditures. That was only a slight decrease from 2018’s $724 million. Understandably, capital expenditures dropped during the pandemic year of 2020 to $642 million.
Mayo Clinic states in the latest bond documentation that it expects capital expenditures to explode and reach $1.38 billion this year. That’s 2018’s $724 million and 2020’s $642 million combined.
The document also states that “Mayo Clinic currently plans to spend an average of approximately $1.3 billion annually from 2021 to 2025.”
When asked about the capital expenditure strategy, Furst said it was about looking to the future.
“Mayo Clinic reduced capital spending in 2020 due to the COVID-19 pandemic and uncertainty about its impact. Mayo is increasing capital spending to accommodate growth in all the markets it serves and to fund investments critical to its long-term strategies in platforms, technology, and digital health,” he wrote.
In terms of construction projects in 2021, Mayo Clinic has an expansion of the Saint Marys Hospital campus underway. That includes Nasseff Tower, named after the late John Nasseff, whose wife donated $60 million toward the project.
Mayo Clinic’s proton beam cancer treatment team recently proposed building a second proton center in Rochester. While the proposal calls for two treatment rooms versus the current four, improved technology and rising costs could put such a project in the same realm of the original $188 million spent on the Richard O. Jacobson Building.
The projections for future capital expenditures could turn out differently. In the 2018 bond release, Mayo Clinic estimated $1 billion in capital expenditures annually from 2019 to 2022.
Whatever Mayo Clinic spends its capital on from 2021 through 2025, it has a variety ways to raise money beyond medical revenue and donations.
Dahlen explained that bonds, either tax-free or taxable, remain important financial tools for Mayo Clinic.
“Mayo Clinic has a number of debt financing options available to fund growth and development. The decision to issue taxable or tax-exempt bonds is based on the relative interest rates for both, as well as the identified uses for the proceeds,” he wrote of this latest bond sale. “Currently, long rates for taxable and tax-exempt bonds are very close, and the taxable structure offers more flexibility on use of proceeds than does the tax-exempt structure.”