LOS ANGELES – Nonprofit West Coast hospital chain Dignity Health received downgrades from Fitch Ratings and Moody’s Investors Service ahead of plans to price up to $500 million in taxable bonds Thursday.
The system, with 39 hospitals in California, Arizona, and Nevada, has experienced three years of poor core performance posting operating losses of $95.6 million in fiscal 2012 and $159 million in fiscal 2011, according to Moody’s report.
Bond proceeds will be used to pay off a $310 million credit line used in August to purchase U.S. Healthworks, a for-profit occupational health services provider with 174 centers in 15 states, said Lisa Zuckerman, Dignity Health’s Treasurer.
Citi will act as the senior manager on the bonds with JPMorgan as co-manager.
The bonds represent Dignity’s first foray into issuing taxable debt, but debt related to for-profit U.S. Healthworks doesn’t quality for tax exemption, Zuckerman said.
Dignity, known until January as Catholic Healthcare West, has more than $4 billion in tax-exempt debt outstanding.
Zuckerman expects the system to issue more taxable debt as it executes a plan to triple in size by 2020 and enters into agreements with other for-profit ventures as part of the growth strategy.
“We are using it to finance things that are not eligible for tax-exempt debt,” Zuckerman said. “As we are shifting to more partnerships with for-profit ventures, we will issue more taxable debt. As our business model changes, how we can finance is changing.”
Though Dignity Health plans to expand across the country and into new business lines, it will remain a public benefit hospital with a non-profit status, Zuckerman said.
After paying off the $310 million credit line, the balance of the proceeds would be used to reimburse cash-flow spent to upgrade its information technology system, for partnership ventures, or the future needs of the corporation, Zuckerman said.
Moody’s downgraded Dignity’s outstanding debt to A3 from A2, but revised the outlook to stable from negative. Fitch downgraded Dignity Health to A from A-plus. The outlook is stable.
While Moody’s analysts were concerned about Dignity’s debt load — which will experience an 18% increase in a 12-month period with the $500 million issuance— the size of the hospital system with fiscal 2012 revenues of $10.5 billion helps ameliorate some of the concern, said Lisa Martin, a Moody’s senior vice president.
The states in which Dignity’s hospitals are located have experienced some of the heaviest levels of economic distress in the country, Martin said.
The hospital system changed its name from Catholic Healthcare West as part of a corporate restructuring. The changes involved switching the fiduciary body from the six Catholic sponsors, which served as the corporate board members, to a self-perpetuating not-for-profit board of directors, according to a Moody’s report.
Dignity’s debt burden is above average for A-rated hospital systems, according to Moody’s analysts.
If it issues the entire $500 million in debt, it will have proforma long-term debt totaling $5 billion, according to a Fitch report. That includes $3.6 billion in fixed rate debt, $1.3 billion in variable rate debt and $147 million in various notes payable and capitalized lease obligations. The variable rate debt includes $789.5 million in long term bonds supported by letters of credit from four banks.
The hospital industry has been experiencing an increased pace of merger and acquisition, but not all have hospital systems have chosen to increase their debt burden this rapidly, Martin said.
Acquisitions like U.S. Healthworks, expected to bolster Dignity’s bottom line, should improve the hospital system’s financials going forward, said Tricia Griffin, a Dignity Health spokeswoman.
In addition to that acquisition, Dignity has also signed a memorandum of understanding to purchase Ashland Community Hospital in Oregon.
The acquisitions help them expand into other states not hit as hard as the three states in which Dignity’s hospitals are located, Griffin said.
“We are operating in states that have higher levels of unemployment and higher levels of uninsured patients,” Griffin said. “Sixty percent of our revenue comes from Medicaid and Medicare. Some providers have stopped taking Medicaid patients, but it is part of our mission to serve the poor.”
The company’s growth plan will enable it to continue its work with the poor and have a strong balance sheet, she said.
