$8,300,000
City of Allegan Hospital Finance Authority
Hospital Revenue and Refunding Bonds
November 1999

$2,520,000
City of Allegan Hospital Finance Authority
Hospital Revenue Bonds
January 2000

First River Advisory designed a capital financing program for this community hospital that took advantage of the different capabilities of a commercial bank and the high-yield bond market. In order to benefit from the bank's preference for medium-term lending, the Series 1999 Bond issue featured a ten-year maturity which was placed with the bank. More significantly, though, First River Advisory persuaded the bank to forego its usual structural and covenant requirements, and accept the terms, conditions and covenants that are common in the high-yield bond market. Much to the chagrin of the banker, the bank received no more preferential treatment than other ordinary bondholders – precisely our objective. First River Advisory estimates that the bank's participation in the Series 1999 Bond issue saved at least 80 basis points on $540,000 principal of bonds.

First River Advisory once again used a balance sheet management technique to define a qualifying project from among over 190 distinct capital assets in order to produce a total principal amount of bonds to be issued of between $10½ million and $11 million. Allegan General management had already determined that incurring this principal amount of debt could be serviced comfortably. At the same time, this magnitude of indebtedness would promote the growth of financial reserves to an appropriate level by financing a substantial portion of Allegan General's capital budget through 2002.

The total amount of debt to be incurred was split into two issues spanning 1999 and 2000 in order to maximize the bank's participation. First River Advisory assisted in the formation of a new bond issuer sponsored by the City of Allegan. Pursuant to the Internal Revenue Code, bonds can be designated "bank-qualified" if, among other conditions, the local governmental unit and all subordinate bond issuers were to issue no more than $10 million of bonds in a single calendar year. The bank-qualified status enables commercial banks to deduct a portion of their cost of carry on their own income tax returns. Because the City planned to issue up to $1.7 million of its own bank-qualified bonds in 1999, Allegan General could issue up to $8.3 million. In order to reach the desired level of indebtedness, Allegan General issued another $2.52 million of Series 2000 Bonds, all of which were purchased directly by the bank. The bank had committed to this purchase of Allegan General's Series 2000 Bonds by the time Series 1999 Bonds were sold. Thus, institutional investors in the Series 1999 Bonds were assured that the remainder of the financing was committed, unlike a competing bond issue which was sold just prior to the offering of the Series 1999 Bonds.