CHFFA REVENUE BOND FINANCING PROGRAM ... - …

CHFFA REVENUE BOND FINANCING PROGRAM

EXECUTIVE SUMMARY

Applicant: Adventist Health System/West

Amount Requested: $325,000,000

("Adventist")

Date Requested: August 4, 2016

2100 Douglas Blvd.

Requested Loan Term: Up to 40 years

Roseville, CA 95661

Resolution Number: 415

Placer County

Project Sites: See Exhibit 1

Facility Types: General acute/ sub-acute and outpatient care

Eligibility: Government Code 15432(d) (1)

Prior Borrower: Yes (date of last CHFFA issue, 2013)

Obligated Group: The Adventist Obligated Group is identified in Exhibit 5

Background: Adventist Health System/West ("Adventist") was established in 1980 by the merging of two smaller health systems known as Adventist Health Services, Inc. and Northwest Medical Foundation. Based in Roseville, California, Adventist is a nonprofit organization whose mission is to improve the quality of health care in the communities they serve by emphasizing wellness and disease prevention. Adventist includes more than 23,400 employees and 4,300 volunteers who work alongside over 5,000 medical staff physicians, 20 hospitals, approximately 260 clinics, 14 home care agencies,

seven hospice agencies and four joint venture retirement centers. Adventist serves communities in California, Hawaii, Oregon and Washington. Adventist operates the largest rural health clinic network in California. See Exhibit 5 for more details.

Use of Proceeds: Bond proceeds will be used to current refund the outstanding CHFFA Series 1998A Bonds and to advance refund CHFFA Series 2009A, California Statewide Communities Development Authority ("CSCDA") Series 2007A and Series 2007B Bonds. Adventist expects to achieve approximately $40 million in debt service savings from the proposed refunding over the life of the bonds.

Type of Issue: Negotiated public offering with fixed rate bonds (expected minimum denominations of $5,000)

Expected Credit Rating: "A" with Stable Outlook (S&P and Fitch)

Financing Team: Please see Exhibit 2 to identify possible conflicts of interest

Financial Overview: Adventist's income statement appears to exhibit solid and improving operating results over the review period with an increasing operating margin and continued revenue growth. Adventist appears to have a solid financial position with an operating pro-forma maximum annual debt service coverage ratio of 3.66x.

Estimated Sources of Funds:

Estimated Uses of Funds:

Bond Proceeds Other funds*

$ 325,000,000 Refunding 24,000,000 Financing Costs

$ 342,500,000 6,500,000

Total Estimated Sources $ 349,000,000

Total Estimated Uses $ 349,000,000

*Other funds includes funds released from prior bonds debt service reserve funds.

Legal Review: Staff has received and reviewed the Eligibility, Legal Review, Religious Due Diligence, Savings Pass Through, Seismic, CEQA documentation, and the Iran Contracting Act Certificate documentation. All documentation satisfies the Authority's requirements.

Staff Recommendation: Staff recommends the Authority approve Resolution Number 415 for Adventist Health System/West in an amount not to exceed $325,000,000 subject to the conditions in the resolution, including a bond rating of at least investment grade by a nationally recognized rating agency. Macias Gini & O'Connell, LLP, the Authority's financial analyst, and KNN Public Finance, LLC, the Authority's financial advisor, concur with the Authority's staff recommendation.

(CA/YW)

I. PURPOSE OF FINANCING:

Over the past ten years, Adventist has engaged in significant capital investments to comply with state-mandated seismic standards, replace aging facilities, and address capacity constraints. Adventist seeks to issue $325 million in CHFFA Fixed Rate Revenue Bonds Series 2016 for the refunding of prior CHFFA debt and CSCDA debt that financed some of these capital investments as well as refund Lodi Memorial Hospital's ("LMH") debt (acquired in June 2015), which will become a member of the Obligated Group with this CHFFA Series 2016 financing. Adventist expects to achieve approximately $40 million in debt service savings from the proposed refunding over the life of the bonds.

Refunding................................................................................................. $342,500,000

CHFFA Insured Variable Rate Hospital Revenue Bonds

(Adventist Health System/West), 1998 Series A1

Proceeds of these bonds were used to finance and refinance the costs of construction, expansion, remodeling, renovation, furnishing, equipping and/or acquisition of certain health facilities owned by Adventist or its affiliates and operated by Adventist's affiliates. The health facilities included Adventist Clearlake Hospital, Inc., Feather River Hospital, Glendale Adventist Medical Center, Hanford Community Medical Center, Sonora Community Hospital, Simi Valley Hospital & Health Care Services, Ukiah Valley Medical Center and White Memorial Medical Center. Portion of the proceeds were used refinance CHFFA Series 1987 Series A Bonds that proceeds were used to refinance certain outstanding indebtedness of certain California Members of the Obligated Group and finance certain renovation, remodeling, acquisition and equipping of various hospital facilities of certain California Members of Obligated Group.

CHFFA Revenue Bonds (Adventist Health System/West), Series 2009A Proceeds of these bonds were used to finance certain health facilities the costs of various capital expenditures including:

(1) the remodel and upgrade of emergency rooms (2) retrofitting to meet seismic requirements (3) expansion, remodeling and equipping departments (4) constructing new facilities and patient towers (5) improving parking facilities and structures (6) equipping new and existing facilities (7) reimbursement for capital expenditures.

The health facilities included Adventist Health Clearlake Hospital, Feather River Hospital, Glendale Adventist Medical Center, Hanford Community Hospital, St. Helena Hospital, and Simi Valley Hospital & Health Care Services.

1 CHFFA 1998 Series A was converted to bear interest at fixed rates in 2008.

Adventist Health System/West Resolution No. 415 August 4, 2016

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CSCDA Insured Revenue Bonds (Lodi Memorial Hospital), Series 2007A Proceeds of these bonds were used to finance the costs of construction, expansion, remodeling, renovation, furnishing, equipping of Lodi Memorial Hospital. The project included a new construction of a four-story patient care wing (the "South Wing") and related site work. The 131,340 square-foot South Wing consists of 1) 30 bed medical/surgical units on each of the second, third and fourth floors, 2) a new emergency department and urgent care enter on the ground floor, and 3) hallway linkage to LMH on the basement and second floor levels.

CSCDA Insured Revenue Bonds (Adventist Health System/West), Series 2007B Proceeds of these bonds were used to finance the costs of construction, expansion, remodeling, renovation, furnishing, equipping and/or acquisition of certain health facilities owned by Adventist or its affiliates and operated by Adventist's affiliates. The health facilities included Feather River Hospital, Hanford Community Medical Center, and Simi Valley Hospital and Health Care Services.

Financing Costs.......................................................................................

6,500,000

Estimated underwriter's discount .................. Estimated cost of issuance.............................

$1,787,500

4,712,500

Total Estimated Uses of Funds ............................................................... $349,000,000

[Intentionally Left Blank]

Adventist Health System/West Resolution No. 415 August 4, 2016

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II. PROPOSED COVENANTS, SECURITY PROVISIONS AND DISCLOSURES:

Adventist Health System/West ("Adventist") acts as the representative of an Obligated Group which, upon issuance of the 2016 Bonds, will consist of Adventist and sixteen (16) affiliate Members (including Lodi Memorial Hospital Association, Inc. d/b/a Lodi Memorial Hospital ("LMH"), which will become a member of Obligated Group with the CHFFA Series 2016 financing), each of which operates hospitals and/or health facilities. All Members are jointly and severally liable on Notes issued under the Master Indenture of Trust (the "Master Indenture") with respect to repayments of loan amounts relating to CHFFA's bonds and other parity debt. Adventist is the borrower under the loan agreement and is bound by all covenants below. There are also protective tests limiting other Members from being added to or withdrawing from the Obligated Group if the change would result in a significant reduction of the financial strength of the Obligated Group.

This executive summary and recommendations include minimum requirements. Additional or more stringent covenants or disclosures may be added following consultation with Authority staff but without further notification to the Authority's Board. These covenants and disclosures cannot be diluted or removed without subsequent review. If there have been modifications to the proposed covenants and disclosures following the preparation of this executive summary, staff will report it at the meeting.

After reviewing the Obligated Group's credit profile, including its current financial profile, prior bond transactions and considering what the market will support, Adventist, KNN Public Finance, LLC (the CHFFA's financial advisor), and the underwriters have all concluded the covenants listed below align the interests of the Obligated Group, CHFFA, and the investors and therefore are consistent with covenants that have applied to the Obligated Group's prior bond transactions and that the Obligated Group's current financial situation does not suggest additional covenants should be required.

The following covenants are applicable for this transaction:

Unconditional Promise to Pay. Adventist agrees to pay the Bond Trustee all amounts required for principal, interest, redemption premium, if any, and other payments and expenses designated in the Loan Agreement. The Obligated Group guarantees all such payments under a Master Indenture Note. All Revenues received by or on behalf of CHFFA and any other amounts held in designated funds or accounts under any Bond Indenture are pledged to secure the full payment of the Bonds issued under the Bond Indenture.

Pledge of Gross Revenues. Each Member of the Obligated Group pledges to deposit all revenues, income, receipts and money received into a Gross Revenues Fund over which the Master Trustee has a restricted account agreement for the benefit of each bond trustee and parity lender.

Negative Pledge Against Prior Liens. Each Obligated Group Member agrees not to create, assume or permit any Lien upon the Operating Assets and Current Assets or their respective Property, Plant and Equipment other than Permitted Liens.

Adventist Health System/West Resolution No. 415 August 4, 2016

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Limited Permitted Liens. Each Obligated Group Member is subject to a restrictive set of allowable liens or encumbrances it may incur pursuant to the Master Indenture.

No Debt Service Reserve. The Bonds shall not be secured by a reserve fund.

Debt Service Coverage Requirement. The Master Indenture contains a debt service coverage requirement based on 1.25 times Maximum Annual Debt Service. A debt service coverage requirement is a ratio measuring ability to make interest and principal payments as they become due by assessing the amount of revenue available to meet long-term debt service payments.

Additional Debt Limitation. Each Obligated Group Member agrees not to incur additional Indebtedness unless authorized by various financial performance or projection measures set out in the Master Indenture.

Limitations on Mergers, Sales or Conveyances. Each Obligated Group Member agrees not to merge or consolidate with any other entity or sell or convey all or substantially all of its assets to any Person outside of the Obligated Group unless authorized by various limiting measures set out in the Master Indenture.

Limitations on Disposition of Operating Assets. Each Obligated Group Member agrees not to sell, lease or dispose of any operating assets unless authorized by various limiting measures set out in the Master Indenture.

Comply with SEC Rule 15c2-12. Adventist will take such action as is necessary to assist the underwriter in complying with SEC Rule 15c2-12. Adventist will contractually agree to disclose designated financial and operating information to the SEC web site (EMMA) during the life of the 2016 bonds and to report designated "material events" such as missed debt service payments, any change in bond ratings, defeasance, redemptions, etc.

Staff and KNN Public Finance, LLC have reviewed the entirety of this financing package and find it to be acceptable.

[Intentionally Left Blank]

Adventist Health System/West Resolution No. 415 August 4, 2016

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