$14,630,000
Wapello County, Iowa
Hospital Revenue Bonds
Ottumwa Regional Health Center
December 2001

Ottumwa Regional Health Center (ORHC) is the cornerstone of a regional health system which includes an affiliated senior housing company, a fundraising foundation, and a for-profit enterprise, all under the control of a parent. When a new chief financial officer with whom First River Advisory had collaborated in the past arrived on the scene in early 2001, he found that ORHC had a major construction project well underway and was repaying bonds that had been issued in 1998 according to a rapid amortization schedule. Further, certain operational assumptions did not materialize, and ORHC was heading for a substantial operating loss by fiscal year end in March. As a result of these factors, its financial reserves were dwindling, and were being projected to diminish to unacceptable levels within a few years.

This financing represents the best example of "balance sheet management" of any in which First River Advisory has been involved. In this instance, the principal rationale for issuing the Series 2001 Bonds was to promote the accumulation of financial reserves by managing the balance sheet, rather than simply financing the construction project. First River Advisory collaborated with ORHC management to construct a complex forecasting model to determine the optimal principal amount of Series 2001 Bonds and their structure. This model was used to evaluate alternative financing approaches, taking into account several variables such as:

• the availability of a letter of credit that could be used to back variable-rate demand obligations VRDOs that were preferred by ORHC;
• the outlook for interest rates at the time that fixed-rate bonds might be sold, and for interest rates on VRDOs over the long term;
• the disposition of the Series 1998 VRDOs;
• the degree to which the amortization of different debt instruments matched the useful lives of the assets to be financed or refinanced; and
• whether an upcoming sizable principal repayment should be refinanced.

Based on First River Advisory's analysis and recommendation, ORHC determined to expand its obligated group to include all but one of its affiliates, most notably Regional Retirement Living (RRL), the senior housing company. During the course of First River Advisory's engagement, plans for an expansion of RRL's facility began to take shape. First River Advisory modified the financing plan to encompass the financing of additional ORHC capital assets so that ORHC financial reserves could be transferred without restriction to RRL and then applied toward the expansion of RRL's facility. This strategy enabled ORHC/RRL to avoid the cost of an entirely separate financing for the RRL facility expansion in the spring of 2002, a savings of over $100,000. To implement this strategy, it was necessary to issue a note under ORHC's master indenture in exchange for the note that had been issued under RRL's master indenture to secure an outstanding series of non-rated, fixed-rate bonds. First River Advisory demonstrated to the satisfaction of the trustee for RRL's bonds that the credit quality of those bonds would improve if they were to be secured by a note issued under ORHC's master indenture.