CHICAGO - Hit with a round of downgrades because of the added debt burden, Elmhurst Memorial Healthcare will enter the market beginning next week with $363 million of mostly new-money bonds to help finance construction of a replacement facility just west of Chicago that will help the hospital remain competitive over the long term.
The hospital will sell $113 million of fixed-rate bonds next week through the Illinois Finance Authority. In the week of May 19 Elmhurst will sell, through the same conduit, about $250 million of variable-rate demand bonds in four series each backed by a bank letter of credit. Citi and Morgan Stanley are co-underwriters, Ponder & Co. is financial adviser, and Jones Day is bond counsel.
The deal includes about $300 million of new money to finance construction of a $450 million replacement hospital in the suburbs west of Chicago. Another $47 million will refund outstanding bonds with a bullet maturity and the remainder will fund a debt service reserve, capitalized interest, and issuance costs.
In need of major upgrades, Elmhurst opted to replace its current facility rather than improve it. The Illinois Health Facilities Planning Board at its February meeting awarded the hospital the certificate of need required to proceed with the new 259-bed facility.
Planning for the hospital has long been in the works. The current campus is just 10 acres and some buildings are more than 80 years old. The new campus is 50 acres, which will allow the hospital to offer more modern amenities like private rooms and will be adjacent to physician offices, said chief financial officer Jim Doyle.
Moody's Investors Service downgraded the credit on Wednesday by two notches to Baa1 from A2. Analysts cited the significant increase of 150% in debt load after the planned sales and a decline in patient volumes that have affected overall operating results.
Fitch Ratings downgraded Elmhurst to A-minus from A, citing the increased debt load, construction risks, and the competitive market it serves. The hospital currently has about $160 million of outstanding debt.
According to analysts, its credit strengths include a leading market share among six other health care providers in a 10-mile radius, strong liquidity with 492 days cash on hand, a 206% cash-to-debt ratio at the close of fiscal 2007, an experienced management team, and an improved but somewhat modest operating-cash flow. Elmhurst had revenues totaling $326 million in fiscal 2007.
In addition to the added debt on its balance sheet, the hospital's challenges include a decline in its lead among competitors to 26.7% in fiscal 2007 from 28.8% in 2005, construction risks, and market risks stemming from its aggressive investment portfolio, with 30% exposure to alternative investments.
The hospital's more than 50% of floating-rate debt also poses some interest rate and put risk. In advance of the new issue, Elmhurst entered into a fixed payor swap in January that calls for it to pay a fixed rate of 4.135% on $120 million while receiving a rate based on the Securities Industry and Financial Markets Association index.
Inpatient admissions declined in fiscal 2005, 2006, and 2007, and are down so far this year. Doyle said the new facility should help improve operating results and is a key to growth. "It's really critical for the future," he said. "It will address a lot of the problems we have with the current facility that is old and out of date."
The finance team considered insurance on the new issue, but lost interest as their ratings began to fall in recent months.
Fitch said while the hospital's credit will suffer in the near term, analysts believe the "new campus will bolster EMHC's long-term market viability and deter any deterioration in market share that may occur if EMHC were to remain at its current facility."
The new hospital is slated to open in 2011. No additional debt is planned to finance the construction costs.
