Track record pays off

Thursday, October 18, 2001 • Vol 7, Issue 20

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Hutch secures top bond insurance, lower-cost debt for constructing $118 million PHS building at Day Campus

By CLAY EALS

Photo by Zimmer Gunsel Frasca

This model looks northeast at the Public Health Sciences building between Fairview Avenue (left) and Aloha Street (right) at the Day Campus, with the aid of the Center's best-ever construction financing. In the background (upper left) are the existing Fairview and Thomas buildings. The PHS building is to be ready for occupancy in February 2004.

In many years of scientific and financial performance, the Hutch has lived the slogan of the late Seattle schools superintendent John Stanford: "Do what you say you will do."

The happy result is that over the next three years the Center will be constructing the new $118 million Public Health Sciences building at debt rates that will save the Hutch more than $1 million a year for the next 30 years.

The lower debt rates come from two landmark financial achievements this fall:

• For the PHS project, the Center procured AAA-level bond insurance for tax-exempt, variable-rate, 30-year bonds from New York-based Ambac Assurance Corporation, a first for the Hutch. The AAA bond insurance guarantees payment to bond-holders should the Center default.
• Independent from the bond insurance, the Center also secured dual underlying A-level ratings on its own credit from Moody's Investors Service and Standard and Poor's, also a first for the Hutch.

Lower interest rates

The bonds will carry the AAA rating, which will result in much lower interest rates than if the Center issued the bonds without bond insurance, and the underlying A rating lowers the Center's cost of the up-front insurance premium to Ambac.

The achievements are all the more remarkable given the Hutch's relative youth among cancer-research institutions and the declining financial well-being of hospitals and other health-care institutions, said Randy Main, the Center's chief financial officer.

"I'm thrilled," he said. "This comes at a time when financial institutions are backing away from health-care institutions, which we tend to get lumped in with. Managed care has really taken a bite out of hospitals and clinics. But the financial institutions realize that we are a very special institution that is well-positioned to compete successfully and pursue research funding and charitable contributions.

"Other research institutions are older, more built-up and have large endowments, so they have more cash and a stronger credit position in the eyes of these bond-rating firms. But we have a research faculty and staff and facilities that are second to none, and they see that."

Main points to the Center's strong track record, scientifically and financially.

"We have consistently done what we said we were going to do," he said. "Financial institutions love that. So even though we have a lot of debt and relatively little cash and endowment, because of our proven ability to attract top-notch faculty and grants, we have convinced these institutions that we are a better credit risk than the numbers alone would suggest. They know it's a stretch, but they also know that we'll be around."

The PHS building, to cover the block bounded by vacated Ward Street, Yale Avenue North, Aloha Street and Minor Avenue North, will be ready for occupancy in February 2004. Easily the Center's largest and most expensive building, it will rise five floors above ground and include 350,000 square-feet of space, including 35,000 for laboratories.

Demolition of the site and re-routing of Aloha Street has begun. The Yale Building - which houses Development, the Employee Service Center and Accounting and Finance - will be razed after its occupants and other administrative staff move into the new, six-floor Administration building one block south in early 2002.

$137 million borrowed

To construct the PHS building, the Center will borrow$137 million to cover the $118 million cost of labor, materials, architecture, engineering, sales tax and permitting plus the up-front outlays for the bond insurance premium, costs of issuance, and the interest expense during construction.

The PHS-building bonds will be underwritten by Lehman Brothers and issued through the Washington Health Care Facilities Authority.

Main said the Center's stature with financial institutions marks a steady improvement from its initial position when it first sought funds to build the Weintraub and Hutchinson buildings, the Hutch's initial new structures on the Day Campus.

"When we assembled the campus and borrowed to build Phase I (Weintraub and Hutchinson), we had no credit history and no experience constructing sophisticated laboratory buildings," he said. "So while we were able to borrow, the costs of borrowing were much higher. Instead of low-cost, long-term bond insurance, we got short-term, high-cost bank guarantees."

The savings from the lower-cost bond insurance alone will save the Center more than $1 million per year for 30 years, compared to the financing to construct the Weintraub and Hutchinson buildings, Main said. He pointed out that most of the Weintraub-Hutchinson debt has since been refinanced with lower-cost AA bond insurance.

"Each financing we have done has been an improvement on previous financing," he said. "That's because we consistently meet our financial-performance objectives, and we've been able to demonstrate that we know how to construct buildings on time."

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