Fitch Places Wisconsin's SynergyHealth on Watch for Upgrade

CHICAGO - Fitch Ratings last week placed West Bend, Wis.-based SynergyHealthInc.'s BBB-minus credit on rating watch for an upgrade in recognition of its newly minted affiliation with the stronger-rated Froedtert & Community HealthInc. system, based in Wauwatosa.

The two systems last week signed a formal affiliation agreement that would add Synergy to Froedtert's obligated group, pending the approval of Synergy's bondholders who have been asked to sign off on the move and on the substitution of Synergy's master notes with a new master note from Froedtert. Bondholder approval is expected by the end of the month.

Synergy has $70 million of outstanding debt while Froedtert currently carries $291 million. The affiliation will raise the amount of debt secured by the Froedtert obligated group by 24%, but Fitch said it believes the impact on the system's credit to be minor and analysts don't expect to take any action on Froedtert's AA-minus and stable credit. Both systems have borrowed through the Wisconsin Health and Educational Facilities Authority.

Synergy had total revenues of $141.6 million in fiscal 2007, equal to about 16% of Froedtert's revenues of $903.2 million the same year.

"Although the addition of Synergy's debt will increase the Froedtert obligated group's total debt outstanding by 24% ... Froedtert on its own had funds available to cover the combined maximum annual debt service of $22.6 million by 6.7 times," Fitch analysts wrote. "It is estimated that the combined entity will continue to maintain liquidity and capital related ratios at or above Fitch's AA category medians."

Analysts said they expect to meet with Froedtert officials during the third quarter and will then update the credits.

The union joins two systems that serve southeastern Wisconsin. Synergy operates the 119-bed acute-care hospital St. Joseph's, a 74-physician multi-specialty group the West Bend Clinic, and an outpatient surgery center. Froedtert operates two hospitals - the 655-bed Froedtert Memorial Lutheran Hospital and 237-bed Community Memorial Hospital - in addition to several ambulatory and outpatient care locations throughout the Milwaukee region. The flagship hospital shares a campus with the Medical College of Wisconsin and the Children's Hospital and Health System.

SynergyHealth had talked to various health care organizations over the last 18 months including Aurora Health Care, Wheaton Franciscan Healthcare, and Froedtert. Aurora initially was set to partner with Synergy, but withdrew its offer in January.

Under the agreement, Froedtert will expand the care offerings at SynergyHealth's facilities in the areas of cancer, primary care, and other specialty services and has committed to securing Synergy's retained earnings of $30 million and matching the funds up to $30 million for the first five years, with an additional $30 million over 10 years. Officials promoted the marriage as a means to achieve economies of scale, avoid duplication of facilities and services, improve access to capital and compete more effectively in a consolidating marketplace.

"This is a very important day for us, joining with leaders who share our values and commitment to serving patients and the community," Bill Petasnick, chief executive officer at Froedtert, said in a statement. "I look forward to the work ahead as we create a strong regional health care organization that responds to the growing needs of West Bend and Washington County."

Standard & Poor's rates Froedtert AA-minus and Synergy BBB.

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