Texas deal marks first bond financing for $3.2 billion hospital project

Rendering of new Lyndon B. Johnson Hospital in Houston. The facility, which is expected to be completed in 2028, is part of a $3.2 billion expansion project financed primarily with Harris County Hospital District voter-approved bonds.

Harris Health

The public healthcare system in Texas’ biggest county plans to sell $839.5 million of limited tax bonds this week, marking its first issue to tap $2.5 billion in debt authorization voters approved in 2023 for an expansion project.

Harris County Hospital District’s $3.2 billion project will be financed largely through debt issuance, along with $700 million from cashflow and philanthropy.

Bonds in the deal led by Jefferies will be repaid with property taxes subject to a Texas constitutional tax rate cap of $0.75 per $100 of assessed valuation of taxable property. For fiscal 2025, the district’s combined operations and debt tax rate is $0.16348. The interest and sinking rate, which backs the bonds, is expected to increase to about $0.02 from $0.00136 once all $2.5 billion of bonds are sold over the next three years, according to the deal’s investor presentation.

The debt is to be structured with serial maturities in 2028 through 2055, according to the preliminary official statement.

Moody’s Ratings said its Aa1 rating for the bonds reflects “the ample taxing headroom of more than 42,000% under the limited tax rate cap to generate dedicated property taxes sufficient to pay debt service, which offsets the inability of the district to exceed the limited rate and the lack of a full faith and credit pledge.”

The district’s boundaries match those of Harris County, the nation’s third-most-populous with 5 million residents.

“Additionally, we expect that (the district’s) important role within the county, along with the strong performance of the local economy, will continue and that the debt profile will remain manageable despite additional planned (limited tax GO) borrowing over the next few years,” the rating agency said in a report.

A stable outlook encompasses the expectation that Harris Health will continue receiving sufficient supplemental funding and tax revenue for operations that will generate sufficient cash flow to fund routine capital and operations, Moody’s added.

KBRA rates the bonds AA-plus with a stable outlook.

“While KBRA’s analysis recognizes the district’s mandate to provide essential healthcare services to the county’s indigent population and considers its financial operations — including the significant reliance on federal healthcare payments — it is the district’s sizable and growing tax base, and the strong limited tax pledge, with ample capacity to raise the ad valorem tax rate, that primarily supports the rating,” it said in a report.

It added that the district’s strengths are counterbalanced by the multi-year capital improvement plan, which may pressure operating expenses, as well as potential operating challenges if the congressional GOP and Trump administration implement significant federal Medicaid funding cuts. Medicaid and Medicare accounted for 73% of the system’s total cash collections for net patient services in fiscal 2024, inclusive of charity care, according to Kroll.

“Nonetheless, KBRA expects the district’s seasoned leadership team to effectively navigate these credit risks at the current rating level,” the report said.

The district has just $59.3 million of limited property tax-backed debt outstanding from the issuance of certificates of obligation, as well as $197 million of senior lien refunding bonds secured by revenue other than property taxes, according to the investor presentation.

Facing a capacity crisis at Lyndon B. Johnson Hospital in Houston and other facilities, Harris Health’s board of trustees placed the bond authorization on the November 2023 ballot, marking the first time it sought voter approval for debt. Proposition A passed overwhelmingly with 72.3% of the vote.

The high level of voter support is a good sign, while the district’s role as a safety net healthcare provider means it has exposure to Medicaid in a state that’s “not necessarily friendly to Medicaid, or looking to potentially cut back,” according to Howard Cure, director of municipal bond research at Evercore Wealth Management, who also noted climate risk given the district’s proximity to the Gulf Coast.

He added that Harris Health’s cash contributions to the project could lower cash on hand, which was 231 days in fiscal 2024, up from 168 days in fiscal 2023.

“It’s a metric that is going to be scrutinized going forward to see if they can maintain a steady level,” Cure said.

A Harris Health spokesperson said given the project’s eight- to 10-year timeline, it’s too early to predict an impact on days cash on hand. As for climate risk, the system is actively investing in infrastructure resilience, sustainable practices, and energy efficiency, the spokesperson added.

Harris County gained 105,852 residents between July 1, 2023, and July 1, 2024, the most of any county in the nation, according to the U.S. Census Bureau.

Harris Health has said at least 1.5 million of what it projects to be the county’s more than 6 million residents by 2050 will be uninsured.

Its board on March 27 gave its final approval to the bonds, which were subsequently approved by Harris County commissioners.

“This is a historic moment,” Harris Heath Board Chair Dr. Andrea Caracostis said, adding the bond financing represents a once in a lifetime opportunity to change the health care of its communities.

In a February presentation to the board, Christopher Janning, a managing director at Hilltop Securities, the health system’s co-financial advisor, said similarly sized bond deals could be sold in March 2026 and June 2027 based on current models of cash flows.

In May 2024, the district broke ground on a $1.6 billion, 12-story, Level I trauma-capable hospital on its Lyndon B. Johnson Hospital campus in Houston that will have 390 private patient rooms, with the potential to expand to 450. The facility is expected to open in 2028.

The $3.2 billion project also includes renovations to Ben Taub Hospital in Houston and construction of a 120-bed tower, as well as upgrades to clinic facilities and the addition of three health centers.

Co-managers for the bond sale are Siebert Williams Shank, Stern Brothers, D.A. Davidson & Co., Estrada Hinojosa, Piper Sandler & Co., SWBC Investment Services, and Wells Fargo Securities. Co-financial advisors are Hilltop Securities and Masterson Advisors and co-bond counsels are Bracewell and Bratton & Associates.

The Harris County Hospital District, which serves as a teaching system for Baylor College of Medicine and the McGovern Medical School at the University of Texas Health Science Center at Houston, dates to 1965 when its creation was approved by county voters.

The following year it became a political subdivision with taxing powers and assumed ownership of two city/county hospitals — Ben Taub and Jefferson Davis, which was replaced by the existing LBJ Hospital in 1989. In 1990, a new Ben Taub hospital opened.