INTER-OFFICE

CORRESPOIIDENCE

DATE:
TO:
THROUGH:
FROM:
SUBJECT:

March1 6,2016

::".J:::;il:JJffiW
LindaCramer,
Assistant
CountyManaOer;l_Lf
Requested
WhitePaperon ChathamCountyHospitalAuthority,
MemorialHealth,Inc.and the proposedNovanttransaction

The Boardhasrequested
a WhitePaperexplaining
the relationship
betweenthe
ChathamCountyHospitalAuthority,
the Countyand MemorialHealthas wellas some
historyon the 2012bondissue.ThisWhitePaperis attached.
Pleasenotethat county staffare stillworkingout detailson the proposed
Memorial/Novant
transaction.
Finalinformation
willbe presented
to the Boardonce
available,
as wellas anydocuments
requiring
the Board'sapproval,

Attachment

Memorial
WhitePaper
/ NovantTransaction
Prepared
for Chatham
CountyBoardof Commissioners
March9,201"6
In December
2015MemorialHealthInc.announced
itsdesireto enter,into
a "strategic
partnership"
with NovantHealth,Inc.,a non-profithealthcaresystembasedin Winston-Salem
andCharlotte,
NorthCarolina.
Thisannouncement
pulledChatham
Countybackinto
discussions
with bothMemorialHealthandthe ChathamCountyHospital
Authority(the
"Authority")
because
the Countyhadprovided
guarantee
a financial
on refunding
bondsissued
by the Authorityin 2012for Memorialwith a parvalueof 5163.88million.Sincethe
announcement,
the Boardof Commissioners
hasaskedstaffto explain
the relationship
betweenthe Countyandthe Authority,describe
the upcomingtransaction,
anddetermine
the
impactof the transaction
on the Authority's
Seriesl}TzAAuthorityBondsaswellasthe
guarantee.
County's
financial
*
Asto its history,the Authoritywasestablished
by Chatham
Countyin October1952as
authorized
bythe GeorgiaHospital
Authorities
Law.TheAuthorityis a publicbody,corporate
andpolitic,with broadpowersto acquire,
construct,
improve,alterandrepairhospitals,
clinics,
nursing
h o m e se, x t e n d ecda r ef a c i l i t i e m
s , e d i c a l o f f i cbeu i l d i n gasn do t h e rp u b l i ch e a l t h
facilities,
TheAuthoritymayissuerevenuebondsand refundoutstanding
bonds,mayestablish
ratesandcharges
for the services
anduseof itsfacilities,
pledge,refundor
and maymortgage,
assignanyrevenueor incomeit receives
assecurity
for its revenuebonds,TheAuthoritymay
i s s u eb o n d sw i t h o u ta p u b l i cr e f e r e n d u m ,
Thebusiness
activities
andaffairsof the Authorityare managed
andconducted
by a
ninememberboardwho servesix-year
staggered
terms.All members
of the Authority's
Board
areappointed
by the Boardof Commissioners
of ChathamCounty.
A listingof currentAuthority
membersis attached.
Mr. DonL.WatersservesasChairof the Authority.
Legalcounselis
providedby Scheer& MontgomeryP.C.
Principal
facilities
consisting
of the generalacutecarehospital
areownedby the
A u t h o r i ta
y n da r el e a s e d
a n do p e r a t e d
b y M e m o r i a(lt h e" H o s p i t a l "T) h
. eH o s p i t ahla sb e e n
leasing
the hospital
facilityfrom the AuthoritysinceOctober 22,1984whenit agreedto assume
allassets,
liabilities,
obligations
and rightsof the Authority.Priorto enteringinto the lease
agreement
with the Hospital,
the Authorityhadownedandoperated
the hospitalfacility.
The
currentleaseagreement
istitledthe Amended
(May1, zOAq,
and Restated
Lease
Agreement
and it reflectsthe termsunderwhichthe Authorityagreesto the Hospital's
operationof the
facilities.

TheLease
Agreement
isa significant
documentas it defines
the relationship
andservice
termsbetweenMemorialandthe Authority;
therefore,the term "leaseagreement"
shouldnot
be viewednarrowly.ln 2012a FirstAmendment
wasaddedto the 2004leaseagreement
to
reflectelements
specific
to the Series2AI2Abondtransaction
including
the restructuring
of
Memorlal's
Boardof Directors.
Provisions
of the currentleasealsoincludethat,upon
termination
of the Leasefor anyreason,
the Hospital
is obligated
to automatically
and
irrevocable
transferthe hospital
facility,anyinterests
of the Hospital
relatingto the hospital
facility,andinterestof the Hospital
in anyrevenuefund aswellasall of itsassets
to the
Authority.
TheAuthoritythenwouldassume
all debts,liabilities
andobligations
of the hospital
facilityandotherhospitalassets
sotransferred,
the Revenue
fund,andthe Hospital's
obligation
for the Series20I2ABondsaswellasrelateddocuments
andobligations
associated
with the
b o n di s s u e .
ln 2012ChathamCountyagreedto providea financial
guarantee
for the Authority's
Series2At2Abondissuein the amountof S163,880,000
throughan Intergovernmental
Contract
betweenthe Countyandthe Authority.
Duringthistransaction
therewerea numberof legal
documents
executedbetweenthe Countyandthe Authority,
the Countyandthe Hospital,
the
A u t h o r i tay n dt h e H o s p i t aalsw e l la sU . SB
. a n kt,h e h o l d e o
r f t h e b o n di n d e n t u r eO. f n o t ea r e
t h e f o l l o w i n pg o i n t s :
TheLoanAgreement
betweenthe Authorityandthe Hospital
definedthe useof
fundsfrom the Authority's
Series70I2Abondissueas i) repayment
of the
outstanding
Series1996ABonds,Series20014BondsandSeries20044Bonds
issuedby the Authorityfor the Hospital,
fundsfor specified
ii) providing
e q u i p m e nat n df a c i l i t i ei sn c l u d i ntgh e C h i l d r e nH
' so s p i t ai m
l p r o v e m e nat sn d
operatingrooms(524,453,874),
andiii)payingthe costsof issuing
the bonds
($2.1million).Thel-996A,
20014and20044bondsall carrieda higherinterest
ratethanthe newlyissuedbonds.Thistransaction
freedup cashfor the Hospital
by providinglowerinterestratesanda restructured
paymentschedule,
similarto
refinancing
a homemortgage
at a lowerinterestrate.
TheAuthorityagreedto provideindigentcarefacilities
andservices
in exchange
guarantee
for the County's
or paymentof the bond'sdebtservicein the
Intergovernmental
Contract
betweenthe Countyandthe Authority.
Thetermof
this contractisthroughthe earlierof fortyyearsor the repayment
of the Series
2OL2Abonds,
TheCountyis authorized
to imposean ad valoremtax levywithina sevenmill
limitationto producerevenuefor paymentof the Authority's
debtservice
2

requirement.
However,
thistransaction
wasneverrepresented
asonewherethe
Countywouldassumeresponsibility
for the Bond'sannualdebtservice
payments.
Variouscontracts
wereexecuted
to ensurethissuchasthe Loan
Agreement.
TheLoanAgreement
betweenthe Hospital
andthe Authorityspecifies
the
m e t h o d sa n dt i m e l i n ews h e r e b y t h e
H o s p i t a l w im
l l a k er e q u i r e d
l e a s ep a y m e n t s
to be usedfor the bond'sdebtservicerequirements.
Funding
for the lease
payments
will be derivedfrom the grossoperating
revenues
of the Hospital.
In
gavethe Countya securityinterestin an investment
additionthe Hospital
a c c o u nht o l d i n ga p p r o x i m a t e5lty+ m i l l i o nw, h i c hi s e q u i v a l e n
t ot t h e m a x i m u m
(MADS)
annualdebt service
on the Series20LZABonds.
Theinvestment
account
couldbe usedto makethe debtservicepaymentin the eventof a defaultbythe
Hospital
on its contractual
obligation.
To ensurethe Hospital's
liquidityand providesecurity'for
the County,
the
H o s p i t aaln dC o u n t ye n t e r e di n t oa C o v e n a nAtg r e e m e nwth i c ho u t l i n e d
a
numbeo
r f c o m m i t m e nm
t sa d eb y t h e H o s p i t ai nl c l u d i nig) e s t a b l i s h m eonf ta
financialreviewcommittee
to meetquarterlyto reviewthe Hospital's
p e r f o r m a n caen dc o m p l i a n ciei ),a r e q u i r e m e n
f ot r m i n i m u mu n r e s t r i c t ecda s h
o n h a n d( l i q u i df u n d s ) e q u a l taot l e a s 6
t 5 d a y so f t o t a l o p e r a t i negx p e n s e s ,
w h i c hw o u l db e v e r i f i e b
d y t h e H o s p i t a l e' sx t e r n aalu d i t oar n n u a l l yili,i )a
Historical
MaximumAnnualDebtService
Coverage
Ratioof at least1..20:1"
for
e a c hf i s c a l y e aorf t h e O b l i g a t eG
(
M
e
m
o
r
i
a
l
droup
H e a l t h& M e m o r i aHl o s p i t a l )
a l s ov e r i f i e db yt h e e x t e r n aalu d i t o a
r n n u a l l yi v, )t i m e l i n efso r p r o v i d i n g
q u a r t e r luy n a u d i t eadn da n n u aal u d i t e df i n a n c i ai nl f o r m a t i ot no t h e C o u n t ya,n d
v) remedies
if the agreement
is not followed.
TheSeries2AnABondswerestructured
to providethe Hospital
with additional
unrestricted
cash/ addedcashflow for operating
andcapitalneeds.At thattime
I D a y so f U n r e s t r i c t eCda s ho n H a n di s c a l c u l a t eads U n r e s t r i c t eLdi q u i dF u n d sf o r e a c hc a l e n d aqr u a r t e a
r nd
calendaryear,respectively,
dividedby the Obligated
for the mostrecentperiod
Group'sTotalOperatingExpenses
of four consecutive
calendarquartersdividedby 365.Unrestricted
LiquidFundsmeansunrestricted
liquidcashor
c a s he q u i v a l e n {t si n c l u d i ntgh e f u n d e dd e p r e c i a t i oanc c o u n t )u, n r e s t r i c t emd a r k e t a b lsee c u r i t i easn df u n d sh e l di n
first securityinterestheldby the Bankand DepositControlAgreementbut excludingi) anyfundsheldby a trustee
and restrictedto useby the ObligatedGroupfor purposesother than payingoperatingexpenses
and debtservice
g e n e r a l l ya,n di i ) b o r r o w e dm o n e y sr e p a y a b luep o nd e m a n do r h e l db y t h e l e n d e a
r ss e c u r i t fyo r l o a no r p e n d i n g
disbursemeu
np
t o nc o m p l i a n cwei t h c e r t a i np r e c o n d i t i o n s .

the Boardexpressed
theirconcernaboutretaining
the highservicelevelsand
employment
basewithinthe community
that wasprovidedby the Hospital.The
termsoutlinedin the Covenant
Agreement
for the Series20I2ABondswereless
restrictive
thanthosefollowedby the Hospital
underthe priorbonds.Most
notablythe DaysCashon Handrequirement
droppedfrom 85 to 65 days.The
average
dailyexpense
asof Sept.30,2015wasS1,285,000
basedon unaudited
n u m b e r s2; 0 d a y sc a s ht h e r e f o r e q u a l 5
s 2 5 . 7m i l l i o nI.n a d d i t i o nt h
, eCounty's
guarantee
provideda bondratingof AaZforthe bonds;the priorbondshada
lowerrating:Standard
& Poor'sratingof BB+(Sept.201,7)
with a stableoutlook
and Moody'sratingof Baa3.TheCounty's
higherbondratingmeanta lower
interestexpense
for the Hospital
andAuthority.
r

Oneprovision
of the Series20L2ABondagreements
wasa revised
structure
to
the Boardof Directors
of MemorialHealthUniversity
MedicalCenterwhich
gf
requireda Bylawchange.
TherevisedBoardconsists up to L7 members
and
n o l e s st h a n1 3 ,w i t h3 m e m b e rbs e i n gp r a c t i c i npgh y s i c i a n
a sn d4 m e m b e r s
beingpartof the Authority,
to includethe Chairof the Authority.
Therevised
B o a r ds t r u c t u rw
e a si n c l u d eidn a M e m o r a n d u o
mf U n d e r s t a n d ibnegt w e e n
the
C o u n t ya n d M e m o r i aHl e a l t hU n i v e r s i tMy e d i c aCl e n t e rT. h eM O Ua l s ol i s t e d
otherobligations
of the Hospital
to the Countythat the Boardof Commissioners
h a dr e q u e s t eidn 2 0 1 2T
, h i si n c l u d etdh e c o n t i n u eodp e r a t i o nosf t h e L e v eIl
T r a u m aC e n t ear n dL e v elll l n e o n a t ai n
l t e n s i vcea r eu n i t sa t t h e 2 0 l l o p e r a t i o n a l
levels.

Pursuant
to the proposed
transaction
betweenMemorialandNovant,Countystaffhave
manyof the sameconcerns
asexpressed
in 2012.Countystaffremainprotective
of the
County's
position.
interests
andare disinclined
to addriskto the County's
financial
TheCounty
isworkingwith itsfinancialadvisorandlegalcounsel
to understand
howthe transaction
would
guarantee
changethe County's
financial
of the 2012bondsandwhatdocuments
from the bond
transaction
needto be modifiedto addfurtherprotection
to the County.
Anysuchmodified
d o c u m e n twsi l lr e q u i r et h e a p p r o v aolf t h e B o a r do f C o m m i s s i o n earns d, o n l yf i n a ld o c u m e n t s
will be sentto the Boardfor approval.
As represented
the proposed
transaction
wouldadd
Novantin as a guarantor
to the Countyfor the 2012bonds;however,Countystaffare
concerned
aboutthe impactof servicelevelchanges
withinthe community
that Novantcould
m a k ei n t h e f u t u r e .
T h eA u t h o r i t yh a sb e e nt a k i n gt h e l e a dr o l ei n t h e n e g o t i a t i o n
wsi t ht h e H o s p i t aaln d
Novantsincetheirapprovalis requiredto amendthe Lease
Agreement,
Countystaffhavemet

with representatives
of the AuthorityandHospital
to determinehowthe County's
interests
can
be incorporated
intoanyfutureor amendeddocuments.
Whiletherearemanyfacetsto this
transaction,
the Countyisfocusing
on the followingitems:
Financial
Liquidity
needs- TheCountywouldlikeMemorialto continue
to retain
a solidcashpositionon its balance
sheet.SinceMemorial's
corporate
structure
will survive
the proposed
transaction,
the 2012bondcovenants
for 55 DaysCash
on HandandMADSwill stillstandaswillthe securedinvestment
account.
The
Countyis interested
in alsomaintaining
the fundeddepreciation
accountwithin
Memorial's
corporatestructure.
Thisaccountcurrentlyhasa balance
of
a p p r o x i m a t eSl yf + Om i l l i o n .
* TheCountyisdiscussing
Service
Levels
howthe Authoritycouldincorporate
serviceleveltermsinto the Lease.
TheCountyis interested
in maintaining
the
currentservice
levelsfor Trauma,Neonatal
ICUandindigentcare.TheAuthority
hasalsoexpressed
interestin maintaining
medicaledilcation
throughthe
r e s i d e n cpyr o g r a mast M e m o r i a l .
LeaseTerm- Novanthasrequested
thatthe Lease
term,whichis now40 years,
be "evergreen"
periodsothat it would
afterten yearsor the endof "Fulfillment"
then renewto 40 years,andthenevery5 yearsbe renewedagain.TheAuthority
is discussing
thisprovision
of the lease.
o

'

- Thetransaction
Detailsof Unwind/Reversion
hasmanydetailsrelatedto how it
w o u l d" u n w i n di"n t h e e v e n to f a t e r m i n a t i oonf N o v a n t 'm
s e m b e r s h inp
MemorialHealth.
Theseprovisions
arebeingreviewedanddiscussed
to ensure
that the residual
entitywouldbe a solventandfunctioning
hospital.
The
d i s c u s s i oi sna l s oc o n t e m p l a t i nhgo wa n dt o w h o ma n yn e wa s s e tw
s o u l db e
purchase.
distributed
or offeredfor
TheCountylogically
hasa stronger
interest
in assetsheldwithinits localareaincluding
Chatham,
Bryan,Liberty,
Effingham
and Bulloch
countiesandthe Jasper/Beaufort
Countyareain SouthCarolina,

Countystaffwill continueto workwiththe Authorityand all partiesrelevant

to this
transaction
to ensurethat the County'sinterests
areprotectedto the fullestpossible
extent,