Newly Upgraded, Chicago-Area Advocate Health to Sell $240M

CHICAGO — With an upgrade from Moody’s Investors Service in hand, Oak Brook, Ill.-based Advocate Health Care Network enters the market beginning today with $240 million of fixed-rate bonds in a deal that cements the Chicago area’s largest health care provider’s acquisition of ­BroMenn Health System.

The Illinois Finance Authority is the conduit issuer for the sale. Citi is the lead manager. Kaufman Hall & Associates Inc. is financial adviser and Chapman and Cutler LLP is bond counsel. Advocate will hold a retail order period today and open up the deal tomorrow to institutional buyers.

The system will use proceeds to refund BroMenn’s outstanding debt, to fund the construction of a new three-story patient tower at BroMenn Memorial Hospital in Normal, to fund other system-wide projects, and to refund other outstanding Advocate debt issued last year. BroMenn will formally become part of Advocate in January. Proceeds will also cover swap termination costs associated with the Advocate refunding piece.

Advocate sought room to issue to up to $650 million through the IFA, but it is only tapping a piece of that authority. “The additional authorization gives us the option for additional refunding down the line should the market become more attractive,” said the system’s chief financial officer, Dominic Nakis. “Our goals would be to reduce event risks” tied to the system’s variable-rate debt.

The system limited its additional interest rate costs tied to problems with its insured variable-rate debt to about $5 million last year. Ahead of the sale, Fitch Ratings and Standard & Poor’s affirmed the system’s AA credit on about $1 billion of debt while Moody’s upgraded its rating to Aa2, bringing it in line with the other two rating agencies.

The system had $3.7 billion of operating revenue in fiscal 2008 and has $4.9 billion of total assets including $2 billion of which is unrestricted. Moody’s raised the credit “based on several years of improved operating margins, a long track record of effectively addressing operating challenges, and a consistently conservative approach to debt and investment management, resulting in very strong debt measures.”

“The rating reflects AHCN’s market leadership, extensive physician network, and solid financial profile,” wrote Standard & Poor’s analyst Brian Williamson.

Fitch said the system’s strengths include its leading market position of 14.9% in the six-county Chicago region, strong debt service coverage of 6.7 times last year, and excellent management practices, including formal processes for asset liability management, pension funding, charity care, and capital allocation.

Fitch’s main credit concern is over the formidable competition posed by other systems and hospitals, including ­Northwestern ­Memorial Hospital, the University of ­Chicago Hospitals, and Rush University Medical Center. Advocate operates eight acute-care hospitals in and around Chicago, led by flagship facilities Advocate Christ Medical Center, Advocate Lutheran General Hospital, Advocate Good Shepherd, and Advocate Good Samaritan.

Moody’s also noted as a challenge a decline in patient numbers this year. Advocate has interest rate swaps on a $121 million series and another $348 million series, both sold last year.  As of Sept. 30, 2009, the mark-to-market on the swaps was a negative $60.6 million and Advocate posted $26.9 million in collateral, which is manageable relative to Advocate’s strong liquidity position, .

The BroMenn acquisition marks the system’s first expansion far south of Chicago into central Illinois. As part of the merger agreement, Advocate is financing construction of a new bed tower and other projects at BroMenn’s main 213-bed campus and its 25-bed Eureka Community Hospital.

BroMenn’s total assets equal 6% of Advocate’s 2008 total assets, while BroMenn’s total 2009 revenues are roughly 5% of Advocate’s annualized total 2009 revenues. BroMenn carries ratings in the single-A category.

“Advocate’s expansion beyond the greater Chicagoland region is a new strategy, which we believe carries some risk as the system integrates hospitals in farther locations while aiming to maintain or improve operating performance at the existing hospitals,” Moody’ wrote.

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Healthcare industry Illinois
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