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Baylor College of Medicine is located in the Houston, Texas Medical Center. The school just issued $111M 5.25% coupon taxable corporate bonds, in addition to a large quantity of municipal bonds.

Baylor College Medicine Bd 5.259% 11/15/2046 (cusip: 07284RAA0) call protected

price: $102.50 yield: 5.1% credit rating: -/A-

The prospectus states:

The College Bonds will be subject to optional, extraordinary optional and mandatory redemption prior to maturity as set forth herein.

The College Bonds will be issued as fully registered bonds without coupons in denominations of $1,000 or integral multiples thereof. Principal of, any redemption price for and interest on the College Bonds will be paid to DTC for the account of DTC Participants, which will credit the accounts of the beneficial owners.

  • Mandatory sinking fund redemption:
YearPrincipal Amount
2038$17.1M
2039$9.4M
2040$9.7M
2041$10M
2042$10.3M
2043$10.7M
2044$11M
2045$11.4M
2046$19.1M
  • Extraordinary Optional Redemption

The College Bonds will also be subject to redemption by the College prior to their scheduled maturity ... any property of the College or any future Obligated Group Member is damaged or destroyed ... title to any property of the College or any future Obligated Group Member or the use or possession thereof is taken or condemned by a competent authority for any public use or purpose to the extent that such entities are prevented ...

I spoke with Baylor College of Medicine Assistant Treasurer Michael Lee who sent an offering circular by email. He explained the new issue is:

... strictly refinancing, when we refinance we try to match the prior structure as much as possible. They are timed to match the original structure ... all our original bonds go out to the dates on the new bonds. It made sense to refinance them.

Baylor wanted to build a new hospital and Mr. Lee explained that economic circumstances forced the school to reconsider.

In 2007 and 2008 auction rate securities collapsed, we had to refinance. Securities market took a big hit and some philanthropy dried up. We put the project on hold and we got it to a weather proof state; no damage due to weather, we are ... looking for the right solution for the building within the Texas Medical Center. It is very large with different medical institutions (including MD Anderson) we are spread out. We are going to consolidate clinical operations into the new space.

Mr. Lee also explained that there are approximately "3,000 plus Baylor College of Medicine alumni in Texas." He indicated this is good for the new out patient clinic because these professionals refer cases to the Texas Medical Center.

Taxable Corp. Bonds vs. Municipal Bonds

Harris County, Texas and Baylor College of Medicine also issued several muni bonds. The Baylor College of Medicine offering circular states:

Simultaneously with the offering of the College Bonds, the Harris County Cultural Education Facilities Finance Corporation (the "Issuer") is offering its Medical Facilities Mortgage Revenue Refunding Bonds (Baylor College of Medicine) Series 2012A in the aggregate principal amount of $202,880,000 (the "Series 2012A Bonds") and Series 2012B in the aggregate principal amount of $75,000,000 (the "Series 2012B Bonds"), and the Issuer intends to offer its Medical Facilities Mortgage Revenue Refunding Bonds (Baylor College of Medicine) Series 2012C in the aggregate principal amount of $75,000,000 (the "Series 2012C Bonds"), all for the benefit of and to be payable from promissory notes to be issued by the College.

Harris Cnty Tex Cultural Ed Fa Med Fac Mtg Rev Ref Bds 2012 A, Baylor College Of Medicine 11/15/2037 callable (cusip: 414008BJ0)

price: $107.25

coupon: 5%

yield: 4.5%

issue date: 09/06/12

original size: $112M

Harris Cnty Tex Cultural Ed Fa Med Fac Mtg Rev Ref Bds 2012 A, Baylor College Of Medicine 11/15/2032, OID(97.96/4.15%) callable (cusip: 414008BH4 )

price: $99

coupon: 4%

yield: 4%

issue date: 09/06/12

original size: $21M

Harris Cnty Tex Cultural Ed Fa Rev Ref Bds 2012A, Baylor College Of Medicine 11/15/2025, OID(97.41/3.75%) callable (cusip: 414008BF8 )

price: $98.70

coupon: 3.5%

yield: 3.6%

issue date: 09/06/2012

original size: $4.8M

Harris Cnty Tex Cultural Ed Fa Med Fac Mtg Rev Ref Bds 2012 A, Baylor College Of Medicine 11/15/2020 callable (cusip: 414008BA9)

price: $115.36

coupon: 5%

yield: 2.8%

issue date: 09/06/2012

original size: $3.3M

Harris Cnty Tex Cultural Ed Fa Med Fac Mtg Rev Ref Bds 2012 A, Baylor College Of Medicine 11/15/2014 callable (cusip: 414008AU6)

price: $106.48

coupon: 4%

yield: 1%

issue date: 09/06/2012

original size: $2.1M

Analysis

Schools and companies are eager to refinance debt when rates are low. It is important to consider that when interest rates go up the prices of these bonds will fall. The iShares Barclays 20+ Year Treasury Bond ETF (TLT) shows that the prices are at a peak:

The Baylor College of Medicine Bonds will mature in 34 years. They are a large issue and there will be many opportunities to consider them. However currently a 5% yield is attractive.

Strategy

Investors with a special interest in medicine should be aware of these bonds. Exposure to upper medium investment grade fixed income can be supportive, because corp. bonds can offer consistency.

If you invest in Intuitive Surgical (ISRG), HCA Holdings (HCA) or a medical equity mutual fund, such as Fidelity Select Medical Equip. Systems (FSMEX), you might consider these bonds.

For example a $100,000 portfolio that keeps 7% invested in health and medicine could consider a 50/50 equity debt allocation. $2,800 in health and medical stocks and a couple Baylor College of Medicine Corp. bonds. In this example instead of a second individual bond or 5 muni bonds I've added Western Asset Premium Bond Fund (WEA).

HCA Holdings price: $28.32Intuitive Surgical price: 498.05Baylor College of Medicine 5.25% 11/15/2046 price: $1,025Western Asset Premium Bond Fund price: $16.51Fidelity Select Medical Equip. Systems (expense ratio 0.84%) price: $27.52
$100,000$500$500$2,050$300$2,500

This example totals $5,850 leaving some room for customization. Now consider a schedule:

Schedule
2012-2016After 3 coupon payments use 50% to buy a new income fund and 50% to buy more Fidelity Select Medical. Every other 3rd payment add to or buy a medical stock.
2017-2021After 3 coupon payments use 50% to buy a new income fund and 50% to buy more Fidelity Select Medical. Every other 3rd payment add to or buy a medical stock.
2022-2026

After 3 coupon payments use 50% to buy a new income fund and 50% to buy more Fidelity Select Medical. Every other 3rd payment add to or buy a medical stock.

2027-2031

After 3 coupon payments use 50% to buy a new income fund and 50% to buy more Fidelity Select Medical. Every other 3rd payment add to or buy a medical stock.

If you have any comments or would like to suggest another security to consider relative to Baylor College of Medicine Corp. & muni. bonds, please comment below.

Source: Baylor College Of Medicine: New Debenture Currently Yields 5%