Beebe’s bond sales for expansion greeted warmly

Beebe Healthcare officials received a strong reception when they went to the bond market recently to borrow money for major expansion projects. Chief Financial Officer Paul Pernice said PNC Bank served as bond underwriter for Beebe. “The orders they received were five times what was available,” said Pernice. “With that level of demand, Beebe received a 4.5 percent interest rate for the $169 million it is borrowing. That’s a very favorable rate.”

He said the big players with mutual funds, like Morgan Stanley, T. Rowe Price and Vanguard, showed great interest in the bonds. “We had lots of courters. Nonprofit hospitals like ours are eligible for tax-exempt bonds,” said Pernice. “They’re favorable for investors because they don’t have to pay state or federal taxes on their interest earnings.”

Representatives from the the financial rating agency Standard and Poor’s visited Sussex County last year to get a feel for the market served by the Beebe system. Pernice said, “They toured our service area, and then spent two hours going over our plans and financial projections. When you’re adding debt, they want to make sure you can support that debt and make the payments.”

Standard and Poor’s held Beebe’s bond rating at BBB, where it has been for the past several years. “That’s investment grade,” said Pernice. “Which means people want to buy them. It’s not quite as high as the A rating of Delaware systems like BayHealth and Christiana that have more cash on their balance sheets. But that still gets us a favorable rate and means our investors will also earn a little higher interest.” He said bond holders, depending on how long they hold their bonds, will earn an annual return of between 2.6 percent and 4.5 percent.

Pernice said Beebe’s total debt will increase from its current $49 million to more than $210 million. “Our annual principal and interest payments will increase from $4.8 million to $13.4 million, which we will service with income from operations [excess of revenues over expenses]. With the anticipated increase in cash flow from our expanded operations, we’re confident we will be able to make the payments while maintaining the high level of healthcare we provide.”

Numbers on the rise again

A recent financial report for the fiscal year that ended in June 2018 showed Beebe’s income from operations totaled about $11.3 million compared to $23.5 million the year before. Beebe officials had anticipated the decrease.

“We had been on an 18- to 20-month run of steadily increasing inpatient numbers and associated revenues,” said Pernice. “A lot of that was due to the large number of people moving into our area. Then the numbers started dipping in 2018 as many procedures started transitioning to outpatient status, along with the impact of our own efforts to keep people out of the hospital. We tried to handle the increases for a while with temporary workers, but over an extended period, that can take its toll, so we ramped up our clinical staff. We’ve had to adjust, and it took some time. The bond managers were asking the same questions and were satisfied we’re on the right track.”

Pernice said halfway into the new fiscal year, the numbers are recovering. “We’re doing well,” he said, “getting back to the levels where we were before.”

The $169 million Beebe is borrowing, along with more than $30 million raised so far from foundations and local fundraising, is supporting construction of a new hybrid operating room, visible along Savannah Road in Lewes, as well as a new emergency medicine center and additional cancer center facilities at the South Coastal Campus on Route 17 near Millville. It will also be funding major improvements to the Margaret H. Rollins Lewes Campus and financing a new specialty surgical hospital at Beebe’s Rehoboth Beach Health Campus on Route 24.

Pernice said Beebe will be paying for its expanded facilities over the course of the next 30 years or so.