CHICAGO — Moody’s Investors Service this week revised its outlook to negative on the Cleveland Clinic Health System’s debt as it prepares to enter the market next month with $800 million of fixed-rate bonds.
The agency affirmed its Aa2 rating on the internationally renowned clinic’s $2 billion in outstanding debt. The upcoming $800 million issue would increase the system’s debt by nearly a third.
“The revision in the outlook to negative from stable primarily reflects the additional rating pressure on CCHS as a result of the increase in debt following the current financing, which is higher and earlier than previously expected, and results in debt measures that are below the Aa2 rating category,” Moody’s analyst Lisa Martin wrote in a report.
The bond sale is tentatively scheduled for Aug. 10, and will be offered in two fixed-rate tranches. Proceeds from a $300 million tranche will be used to refund 2008 variable-rate debt, while proceeds from the remaining $500 million will raise new money to finance capital projects.
JPMorgan is the lead underwriter on the transaction. The Ohio Higher Educational Facility Commission will issue the debt on behalf of the hospital.
After the sale, the Cleveland Clinic will have a debt-to-cash-flow ratio of 4.7 times, peak debt service coverage at a “moderate” 3.8 times, and cash-to-debt at a “modest” 88%, according to Moody’s. Those measures could improve based on projected 2009 financial results.
In addition to the increase in debt, the system’s balance sheet could be further burdened by a $286 million pension contribution required in 2010 that stems from recent losses in its pension investment portfolio.
Moody’s praised the clinic for its strong international reputation and noted significant improvement in operations during the first six months of this year. “Based on CCHS’s past abilities to respond to operating pressures quickly and effectively, we expect the system will at least meet projected operating and liquidity targets,” Martin wrote.
With a 46% market share in Cuyahoga County region, the hospital is expected to suffer from the weak economy and see an increase in charity care rates.
Moody’s raised its rating to Aa2 from Aa3 on the Cleveland Clinic’s debt last September. Standard & Poor’s rates the system AA-minus.
