Cleveland Clinic Health System Obligated Group - FMSbonds.com
Cleveland Clinic Health System Obligated Group - FMSbonds.com Cleveland Clinic Health System Obligated Group - FMSbonds.com
Cleveland Clinic Health SystemNotes to Consolidated Financial Statements (continued)11. Hospital Revenue Bonds and Interest Rate Swaps (continued)The outstanding Series 2006A, 2006B, 2004A, 2004B, 2003C, 2002, 2001, 1997 and 1983Bonds bear interest at a variable or auction rate, as determined by an external agent. During 2007and 2006, the rates for the System’s variable rate and auction rate bonds ranged from 2.67% to4.50% (average rate of 3.66%) and 2.33% to 4.08% (average rate of 3.38%), respectively.Subsequent to December 31, 2007, certain of the auction rate bonds had a failed auction. TheSystem’s auction rate bonds include various maximum rate provisions in the event of a failedauction. The average interest rate incurred on the auction rate bonds subsequent to December 31,2007 was 4.72%. The System is considering restructuring all or a portion of the auction ratebonds due to these provisions. On February 21, 2008, the System issued a purchase in lieu ofredemption letter to the holders of the Series 2006A and 2006B auction rate bonds, which will beaccounted for as an extinguishment for accounting purposes. As of March 12, 2008, the Series2006A and 2006B bonds will be held by the System until restructuring plans are determined.Certain variable rate revenue bonds are secured by irrevocable direct pay letters of credit orstandby bond purchase agreements totaling $265.2 million at December 31, 2007.In connection with the issuance of tax-exempt bonds by Cuyahoga County for the benefit of theSystem, the Foundation has leased to Cuyahoga County, and Cuyahoga County has subleased tothe Foundation, substantially all of the health care facilities of the Foundation and certain of itscontrolled affiliates (CCHS Obligated Group). The System does not receive rental paymentsunder its lease to Cuyahoga County and is required only to make rental payments to the trusteeon behalf of Cuyahoga County at the times and in amounts sufficient to pay principal and intereston the outstanding tax-exempt bonds under its lease from Cuyahoga County. The leaseagreements expire upon repayment of all indebtedness secured by the leases.In connection with the issuance of tax-exempt bonds by Collier County, Florida for the benefit ofthe System, Collier County and the System entered into a loan agreement whereby CollierCounty loaned the proceeds of the Series 2003C Bonds to the System. Under the loan agreement,the System is obligated to make interest and principal payments.The Lakewood Series 2003 and Series 1983 Bonds are obligations of Lakewood under a trustindenture between the City of Lakewood (the City) and Lakewood; whereby Lakewood hasleased to the City, and the City has subleased to Lakewood, substantially all of Lakewood’shealthcare facilities.26
Cleveland Clinic Health SystemNotes to Consolidated Financial Statements (continued)11. Hospital Revenue Bonds and Interest Rate Swaps (continued)During the term of the various agreements and leases, the System is required to make specifieddeposits with trustees to fund principal and interest payments due, which were $3.7 million and$4.4 million at December 31, 2007 and 2006, respectively. Unexpended bond proceeds held bythe trustee were $95.0 million and $259.6 million at December 31, 2007 and 2006, respectively.The current portion of the unexpended bond proceeds were $43.6 million and $23.8 million atDecember 31, 2007 and 2006, respectively, and included in investments for current use. TheSystem is subject to certain restrictive covenants, including provisions relating to certain debtratios, days cash on hand and other matters. The System was in compliance with these covenantsat December 31, 2007.Combined current aggregate maturities of the bonds for the five years subsequent toDecember 31, 2007, are as follows (in thousands): 2008 – $3,990; 2009 – $3,305; 2010 – $6,190;2011 – $24,285; and 2012 – $25,610.Total interest paid approximated $66.6 million and $62.3 million in 2007 and 2006, respectively.Capitalized interest cost and income approximated $14.8 million and $5.6 million, respectively,in 2007 and $12.9 million and $9.0 million, respectively, in 2006.Interest Rate SwapsThe System’s objectives with respect to management of interest rate risk include 1) managing therisk of increased debt service resulting from rising market interest rates and 2) managing the riskof an increase in the fair value of outstanding fixed rate obligations resulting from decliningmarket interest rates. Consistent with its interest rate risk management objectives, the Systementered into various interest rate swap agreements with a total outstanding notional amount of$560.3 million and $332.1 million at December 31, 2007 and 2006, respectively. During the termof these transactions, the fixed rate swaps convert variable rate debt to a fixed rate and thefloating rate swap converts fixed rate debt to a variable rate. Under the floating rate swap, theSystem pays a rate equal to the Securities Industry and Financial Markets Association MunicipalSwap Index (SIFMA Index), an index of seven day high grade tax exempt variable rate demandobligations. The SIFMA Index rates ranged from 3.09% to 3.95% (average rate of 3.62%) in2007 and 2.93% to 3.97% (average rate of 3.45%) in 2006. In return, the System received a fixedrate of 5.35% in 2007 and 2006. Net interest paid or received under the swap agreements isincluded in interest expense.27
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<strong>Cleveland</strong> <strong>Clinic</strong> <strong>Health</strong> <strong>System</strong>Notes to Consolidated Financial Statements (continued)11. Hospital Revenue Bonds and Interest Rate Swaps (continued)The outstanding Series 2006A, 2006B, 2004A, 2004B, 2003C, 2002, 2001, 1997 and 1983Bonds bear interest at a variable or auction rate, as determined by an external agent. During 2007and 2006, the rates for the <strong>System</strong>’s variable rate and auction rate bonds ranged from 2.67% to4.50% (average rate of 3.66%) and 2.33% to 4.08% (average rate of 3.38%), respectively.Subsequent to December 31, 2007, certain of the auction rate bonds had a failed auction. The<strong>System</strong>’s auction rate bonds include various maximum rate provisions in the event of a failedauction. The average interest rate incurred on the auction rate bonds subsequent to December 31,2007 was 4.72%. The <strong>System</strong> is considering restructuring all or a portion of the auction ratebonds due to these provisions. On February 21, 2008, the <strong>System</strong> issued a purchase in lieu ofredemption letter to the holders of the Series 2006A and 2006B auction rate bonds, which will beaccounted for as an extinguishment for accounting purposes. As of March 12, 2008, the Series2006A and 2006B bonds will be held by the <strong>System</strong> until restructuring plans are determined.Certain variable rate revenue bonds are secured by irrevocable direct pay letters of credit orstandby bond purchase agreements totaling $265.2 million at December 31, 2007.In connection with the issuance of tax-exempt bonds by Cuyahoga County for the benefit of the<strong>System</strong>, the Foundation has leased to Cuyahoga County, and Cuyahoga County has subleased tothe Foundation, substantially all of the health care facilities of the Foundation and certain of itscontrolled affiliates (CCHS <strong>Obligated</strong> <strong>Group</strong>). The <strong>System</strong> does not receive rental paymentsunder its lease to Cuyahoga County and is required only to make rental payments to the trusteeon behalf of Cuyahoga County at the times and in amounts sufficient to pay principal and intereston the outstanding tax-exempt bonds under its lease from Cuyahoga County. The leaseagreements expire upon repayment of all indebtedness secured by the leases.In connection with the issuance of tax-exempt bonds by Collier County, Florida for the benefit ofthe <strong>System</strong>, Collier County and the <strong>System</strong> entered into a loan agreement whereby CollierCounty loaned the proceeds of the Series 2003C Bonds to the <strong>System</strong>. Under the loan agreement,the <strong>System</strong> is obligated to make interest and principal payments.The Lakewood Series 2003 and Series 1983 Bonds are obligations of Lakewood under a trustindenture between the City of Lakewood (the City) and Lakewood; whereby Lakewood hasleased to the City, and the City has subleased to Lakewood, substantially all of Lakewood’shealthcare facilities.26