Quantcast
Regional News

Centegra Health Restructuring Debt as it Plans New Hospital

CHICAGO – Illinois-based Centegra Health System will offer up $200 million of mostly refunding bonds Thursday in a restructuring of its debt portfolio designed to lay the groundwork for future issuance to finance a new hospital to serve the far northwestern suburbs of Chicago.

The system won a certificate of need -- required for hospital construction projects -- from state regulators in August for a proposed 128-bed facility in Huntley with a price tag not to exceed $233 million. Two competing systems have filed a lawsuit challenging the Illinois Health Facilities and Review Board’s action.

The state board’s decision marked just the second time in three decades that a certificate of need was granted for a new facility, although it’s approved many replacement facilities.

JPMorgan is the senior manager and US Bancorp is co-senior manager on Centegra’s refunding. Jones Day is bond counsel and the Illinois Finance Authority is serving as conduit issuer.

“We decided to take advantage of the favorable market conditions to restructure our debt,” said Centegra’s chief financial officer, Bob Rosenberger. “Overall, the refinancing plan should strengthen Centegra’s credit profile and reduce our financial risks.”

Brian McGough, a public finance banker working on the transaction for US Bancorp, said that, in addition to the low interest rate environment,  single-A rated Centegra will benefit from a shrinking of credit spreads in the healthcare sector.

The restructuring will shift all of the system’s floating-rate debt in its roughly $200 million debt portfolio to a fixed rate.

It also will cover the negative valuation of unwinding swap products tied to its 2002 bonds, and improve near-term liquidity and cash flow by lowering debt service requirements in the first five years as construction gets underway on the hospital. The restructuring also will reduce the maximum annual debt service requirement in any given year, Rosenberger said.

The deal will refinance debt issued in 1998, 2002, 2003, 2007, and 2010. The system also will use $10 million to finance an electronic health record project.

The system will adopt a new master trust indenture as part of the transaction, with its bonds being secured by the unrestricted receivables of the obligated group.

The group includes the parent corporation and its 166-bed acute care facility Centegra Hospital-McHenry and the 86-bed acute care facility Centegra Hospital-Woodstock. A not-for-profit real estate holding company will be added to the group, as would the new hospital once built.

Ahead of the sale, Fitch Ratings and Standard & Poor’s affirmed Centegra’s A-minus ratings, but both revised their outlook to negative from stable due to the eventual increase in debt expected to finance the new hospital.

“The outlook revision reflects our view of the high likelihood that additional new money debt will be issued during the next one to two years because of CHS’ new hospital project in Huntley and the pressure that the new money debt could cause to both the balance sheet and maximum annual debt service coverage,” said Standard & Poor’s analyst Suzie Desai.

The agency adds that it recognizes the potential medium- to long-term value of a hospital in a growing service area.

“As we receive the full details of the project and financing next year, we will more fully incorporate the effects of the new hospital construction and debt plans into the rating,” analysts wrote.

Rosenberger said the new hospital “is very strategic to Centegra’s” long-term operating plans and its need is supported by ongoing growth in the region. Financing plans and total debt issuance requirements have not been finalized for the new hospital.

The price tag also is not yet set, but the system expects to complete it for an amount well under the $233 million allowed under its CON. Centegra hopes to open the hospital in 2016.

The offering statement on the upcoming issue reports that financing will primarily come from tax-exempt issuance. The hospital will serve the southern edge of McHenry County and the northern area of Kane County, both fast-growing areas on the outskirts of the Chicago metropolitan area.

The preliminary offering statement discloses the lawsuits challenging the certificate of need.

“While the outcome of such lawsuits cannot be predicted, management of the corporation is confident that the state board’s decision will be upheld,” the offering statement reads.

Mercy Health System, whose application for a certificate of need for a new hospital in the area was rejected by the state board, and Sherman Health, which operates a two-year-old hospital in the region, filed the lawsuits in late summer.

Both complaints -- filed in Will County Circuit Court -- argue that the state’s decision violated state and board standards imposed on new hospital construction, claiming the new facility is not needed and will hurt existing facilities.

The credit benefits from the system’s location in a market with favorable demographics, its strong market share of 46% in its primary service area, and good liquidity of $183 million at the end of August, Standard & Poor’s wrote.

According to Fitch, the rating “reflects Centegra’s leading market share position in a favorable service area, light but stable operating profitability and adequate liquidity indicators. The primary credit concern is Centegra’s high debt burden and the expected issuance of additional debt associated with the construction of a new hospital in the near to medium term,” Fitch said, adding that it “believes this hospital will strategically position Centegra to capitalize on growth in McHenry County.”

The system’s ongoing challenges include moderate debt levels, pressure posed by future debt issuance, lighter operating margins in recent years due to some one-time costs, an increase in its Medicaid base, and competition from other facilities in the region, Standard & Poor’ wrote.

Acute care admissions declined by less than 1% to $16,437 in fiscal 2012 and maximum annual debt service was 2.8 times. Centegra had total operating revenues of $427.5 million in fiscal 2012.

JOIN THE DISCUSSION

SEE MORE IN

RELATED TAGS

Comments (0)

Be the first to comment on this post using the section below.

Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.

Upcoming Events

Already a subscriber? Log in here
Please note you must now log in with your email address and password.