Deal in Focus

Trinity Health Sets 5-State Deal

CHICAGO — Michigan-based Trinity Health Corp. will bring the year's largest health care deal to market next week when it sells $648 million of debt, some of which will finance its recent acquisition of Loyola University Health System.

The transaction includes five series of bonds being issued through five separate state authorities, and an additional $100 million private placement through the Illinois Finance Authority.

The finance team was still working out final structural details as of Tuesday, but the publicly issued debt includes a mix of new-money and refunding bonds that will likely be structured in a fixed-rate mode. The pricing date of the transaction has not yet been set.

Trinity's recent purchase of suburban Chicago's Loyola is the latest in a series of mergers across the sector, particularly among Catholic hospitals, underscoring a trend driven in part by hospitals' preparations for the federal health care law, which will start to take effect in 2014.

Based in Novi, Mich., Trinity is a 47-hospital system that operates in nine states and is the country's fourth-largest Catholic health care system. It derives most of its revenues from Michigan and Ohio, where the relatively weak economies are partially offset by the system's overall geographical diversity, according to rating analysts.

The addition of Loyola, a two-hospital system that generates $1.1 billion of average net-patient revenue, is expected to make metro Chicago the third largest market for Trinity and strengthen the system's bottom line.

Standard & Poor's, Fitch Ratings and Moody's Investors Service all rate Trinity double-A with stable outlooks.

Trinity will be one of only a handful of similarly sized, double-A rated health care credits to issue debt this year. The strength of the credit as well as relatively low issuance levels are likely to attract investors.

"Health care issuance has been down like the rest of the market, so there has not been a lot of opportunity to buy these names in the primary market," said Andy Foust, a vice president at Morgan Keegan & Co. who covers the hospital sector. "Institutional investors have seen a diminished appetite for lower-rated health care names, but Trinity should provide investors with a double-A credit and attractive spreads."

Foust noted that while size does not always mean quality, many investors are more comfortable with larger credits.

Loyola will become Trinity's first academic health center, which adds prestige and could provide a future source of income through research and academic grants, noted Allan Baumgarten, an analyst based in Minnesota who writes annual health care market reviews for 12 states.

Goldman, Sachs & Co. is senior manager and Bank of America Merrill Lynch is co-senior. Cabrera Capital Markets LLC and Loop Capital Markets LLC will join the underwriting team for the Illinois bonds only. Kaufmann Hall & Associates is financial advisor and Hawkins Delafield & Wood LLP is bond counsel.

The transaction is divided into five series: $327 million issued through the Michigan Finance Authority; $150 million via the Illinois Finance Authority; $107 million through the California Statewide Communities Development Authority; $63 million through Montgomery County, Md.; and $14.3 million issued by Franklin County, Ohio.

The system will also privately place $100 million of floating-rate notes with JPMorgan and PNC through the Illinois authority. Proceeds from the new-money piece of the deal, at least $250 million, will finance various capital projects across the system, including Loyola.

Another $334 million of bonds will go to retire commercial paper the system used to retire Loyola's outstanding long-term bonds when it took over the system. It will also convert $103 million of variable-rate bonds issued in 2000 for California facilities into fixed-rate mode and refund fixed-rate bonds issued previously in Michigan and Maryland to achieve savings.

Afterward, Trinity will have $3.1 billion of outstanding debt. Of that, 79% is fixed rate and 21% is variable rate after the effect of a several floating-to-fixed interest rate swaps that hedge the debt. Without the swaps, roughly 60% of the underlying debt is fixed rate and 40% is variable rate.

The borrowing comes as Trinity is in the midst of a $2.7 billion capital campaign. It plans to borrow up to $900 million over the next three years to finance the plan, according to bond documents. It also plans to spend up to $400 million over the next seven years through 2018 on the Loyola campus, expenditures that were part of the acquisition agreement.

The Loyola merger, which closed June 30, marks the latest consolidation across the hospital sector. Illinois alone has seen a surge of mergers over the last year, with more pending. Central DuPage Health and Delnor Health, both of which serve the western and northwestern suburbs, have joined forces. Chicago-based Resurrection Health Care and Mokena, Ill.-based Provena Health have reached a merger pact. Trinity is also in talks to acquire Chicago's Mercy Hospital.

Meanwhile, Ascension Health of St. Louis, the nation's largest nonprofit system, announced in mid-September that it was in talks with Alexian Brothers Health System of Arlington Heights, Ill.

Analysts for years have predicted the rising wave of mergers, a trend that tends to strengthen smaller, lower-rated credits and give them access to the market. Moody's, for example, upgraded Loyola's rating one level to A2 following the completion of the school's sale of its health system to Trinity.

"There is a lot of acquisition activity going on, but in particular there is a lot going on within Catholic hospitals across the country," said Baumgarten.

He noted that Ascension recently created a separate unit devoted entirely to acquisitions. "Ascension is saying, 'We want to be a white knight to some of these sort of vulnerable Catholic hospitals and build them up,' " he said.

Trinity's acquisition of Loyola — or Mercy Hospital — will have little impact on the Illinois market, which Advocate Health dominates. The Michigan market, meanwhile, has seen less merger activity than Illinois, but could be next, Baumgarten said.

The biggest merger there came last year when the for-profit, Tennessee-based Vanguard Health system acquired the Detroit Medical Center.

The deal included Vanguard's pledge to spend at least $500 million on capital improvements to the Detroit campus, a move that might give DMC competitors pause, Baumgarten said.

"That's an effort to pull market share from [neighboring hospitals] in the suburbs, in an environment where the utilization of inpatient care is shrinking," he said. "I think some of the hospital systems will look at each other and say maybe we need to combine forces to be more competitive in this market."



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