Proof of effective management structure and justification for size and scope of project are needed
The financial advisers for the University Medical Center governing board told the panel Wednesday that the hospital still has hurdles to clear before winning coveted federal government backing for the $400 million bond sale needed to complete construction of the state's Charity Hospital successor.
View full sizeUniversity Medical Center is planned for a lower Mid-City tract bordered by South Claiborne Avenue, Canal Street, Galvez Street and Tulane Avenue. The area was photographed in April 2008.Michael Maloney of J.P. Morgan's health-care division and Joseph Spiak of AMS Healthcare Mortgage Corporation told the board they will meet in the coming weeks with U.S. Department of Housing and Urban Development representatives to discuss the $1.2 billion project.
Primary on the agenda: proving to the feds that an effective management structure is in place and justifying that the size and scope of the hospital will yield the patient demand -- and cash -- to keep the hospital viable and to pay back bond buyers.
Only if they clear that hurdle will the UMC board be invited to submit a formal application for the mortgage insurance. Failure to win final federal approval, the advisers reminded the board, could force the project onto the high-yield bond market, a significantly riskier and more expensive proposition.
A written presentation from the advisers said the upcoming trip to Washington "may be our only bite at the apple."
UMC Board Chairman Robert Yarborough and Louisiana State University executives brushed aside any worries that the HUD application won't go through.
"I wouldn't read anything into that," Yarborough said. "Stay positive."
Nonetheless, the advisers' presentation is a stark reminder that the ambitious medical complex is far from complete more than five years after Hurricane Katrina led state and LSU officials to shutter Charity Hospital.
Government insurance for the project would virtually guarantee a smooth bond sale, while an independent debt acquisition would command rates at least 2 percentage points higher with no guarantees of attracting enough investors.
Two points difference would be, initially, of $8 million in annual debt service payments, not an insignificant sum for a hospital that already is projected to need as much as $70 million in annual subsidy from the state general fund.
What's just as imposing are the potential delays in the construction schedule, which already has been pushed back during the past year. State-hired architects have plans drawn, state consultants are completing land acquisition and the state facilities office is ready to hire a construction manager. But, Spiak told the board, as long as the state is pursuing the HUD insurance, the state cannot proceed with site preparation and construction without HUD's permission.
Meanwhile, J.P. Morgan and other consultants are now three months into HUD's "pre-application process" that Spiak said usually takes two to four weeks. Once HUD invites a hospital to file a formal application, it can take another five to seven months to a bond sale, according to a J.P. Morgan timeline.
Maloney and Spiak convinced the board to approve a partnership with the LSU Health System to act as an "interim and transitional" management team for the new hospital.
The board agreed, though not without discussion that resurrected some of the tensions that marked the long struggle among LSU, Tulane University and other area schools preceding the board's creation last year.
Alden McDonald, the Xavier University appointee, noted that LSU hired J.P. Morgan before the board first convened, only for J.P. Morgan to recommend formalizing a relationship with LSU.
"It looks like there is a one-sided ballgame," McDonald said. "It gives me a little heartburn."
Yarborough said the arrangement effectively codifies what in practice is already happening, since LSU's health care division has been supplying the consultants with the information necessary to prepare a business model and make projections.
The board also authorized Yarborough to negotiate contracts with Spiak's firm and J.P. Morgan Health and Housing Funding Corporation to act as mortgage bankers; J.P. Morgan Securities and Morgan Keegan to act as bond underwriters; and Schulkens Communications and Buisson Creative Strategies to serve as public relations consultants.
Bill Barrow can be reached at bbarrow@timespicayune.com or 504.826.3452.