CHICAGO - Joliet, Ill.-based Silver Cross Hospital and Medical Centers is looking at entering the market as soon as this week with its long-planned sale of $250 million of fixed-rate bonds to help finance construction of a replacement hospital - an undertaking that officials believe was worth multiple-notch downgrades over the long term.
Goldman, Sachs & Co. and Barclays Capital are underwriters on the transaction, which is being sold through the Illinois Finance Authority. Jones Day is bond counsel.
Officials working on the transaction said they are considering entering the market this week, based on a day-to-day review of market conditions. The credit is now rated in the BBB category after downgrades from Fitch Ratings and Standard & Poor's due to the impact of the additional debt on the hospital's balance sheet.
Proceeds of the sale will finance a $400 million, 289-bed replacement hospital in nearby New Lenox, about three miles from the existing facility. The hospital enjoys a 31.6% leading market share in its service area in Will County, about 40 miles southwest of Chicago. Inpatient admissions have grown 46% since 2001 and surgeries are higher by 32%. The hospital also will contribute $137 million in cash to help finance construction.
The county has experienced explosive growth over the past 15 years and projections suggest that strong growth will continue for the next 25 years. The hospital last summer won a certificate of need to build the facility from the Illinois Health Facilities Planning Board, which regulates hospital construction in the state.
Silver Cross' application was opposed by Joliet officials concerned that the hospital would abandon low-income residents in the city by moving to a location just a few miles away in a rapidly developing, but more affluent, area.
Officials from Will County, which includes both Joliet and the new site in New Lenox, endorsed it, saying it would provide better services to the region overall. The planning board so far has rejected efforts of Naperville-based Edward Hospital - far west of Chicago in DuPage County - to enter the Will County market with a new $250 million, 162-bed hospital.
"Illinois' restrictive certificate of need environment provides a degree of comfort that encroachment from other providers should be minimal during the construction," Fitch noted.
In anticipation of the debt, Fitch placed the hospital's A credit on negative watch ahead of its restructuring last June of $86 million of auction-rate securities into fixed-rate debt. The agency moved earlier this month to downgrade the credit two notches to BBB-plus from A. Standard & Poor's took even steeper action, dropping the credit down three levels to BBB from A. A total of $376 million of debt is affected.
"This bond issue, consisting of all new money, places significant pressure on the balance sheet, whereby leverage is much higher, coverage of maximum annual debt service is slim, and projected profitability and liquidity over the next couple of years is below average," said Standard & Poor's analyst Antionette Maxwell. "The stable outlook reflects the system's record of meeting projected targets and the current fiscal 2009 stable financial profile, including the preservation of a good liquidity level."
While the hospital's credit took a hit because of the added debt load, officials believe a new facility is needed as the current hospital is constrained in dealing with growing patient volume levels due largely to population growth in the area. The region expects 20% growth between 2005 and 2010 and another 22% from 2010 to 2015.
Analysts also view negatively Silver Cross' reliance on Medicaid payors for 12% of its revenues, leaving it vulnerable to slow state reimbursement and construction risks. In the hospital's favor is its strong market position, service area, and solid profitability over the last four years with revenues of $252.6 million last year.
