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Advocate Heads Into Market with $150 Million Issue

CHICAGO – Oak Brook, Ill.-based Advocate Health Care Network heads to market later this week with $150 million of new-money to finance projects including a new patient tower at one of its 10 Illinois hospitals.

Most of the proceeds would provide financing for the new $300 million tower at Advocate Christ Medical Center and a new $109 million outpatient diagnostic and treatment center and cancer center at its Illinois Masonic Medical Center in Chicago, said the system’s chief financial officer Dominic Nakis.

Proceeds of the fixed-rate transaction may also finance other projects including the ongoing construction of its $202 million ambulatory facility at Christ Medical Center located in suburban Chicago. Advocate is the largest not-for-profit health system in the state with its hospitals enjoying a leading or prominent market share in their service areas.

The system received state regulatory approval for the Illinois Masonic project in late October but on the new patient tower is awaiting a vote of the board that regulates new hospital construction at its meeting early next month. Construction is ongoing on the ambulatory facility and it’s expected to be completed next year.

The Illinois Finance Authority board is expected to sign off on the transaction at its meeting Tuesday. Citi is the senior manager with Loop Capital Markets and Cabrera Capital Markets LLC serving as co-managers. Kaufman, Hall & Associates Inc. is the financial adviser and Chapman and Cutler LLP is bond counsel.

Ahead of the sale, all three rating agencies affirmed Advocate’s mid double-A level ratings which impacts the deal and $1.1 billion of outstanding debt. It also has top short-term marks on floating-rate debt for which it provides self-liquidity.

The bonds are unsecured obligations of the obligated group and are not secured by a pledge of, mortgage on, or security interest in any obligated group assets.

Advocate benefits from its status as the largest provider in the Chicago area with well-positioned hospitals, sustained improvement in its operating margins, moderate debt, and well-funded pensions, Moody’s said.

The system's challenges stem from an increasingly competitive and consolidating health care market, moderate margins compared with similarly-rated peers, and expected increases in capital spending.

The hospital has cash on hand to cover 301 days of operations and has unrestricted cash and investments totaling nearly $3.4 billion providing strong debt service coverage ratios. Its facilities generate $4.65 billion of revenues in fiscal 2011.

Fitch said the rating “is supported by Advocate's light pro forma debt level, consistent cash flow and strong coverage levels, strong market position, and well integrated care delivery model.”

Advocate has expanded its geographic reach steadily through acquisitions over the years and has broadened its reach beyond the Chicago region to include other areas of the state.

The system operates 10 acute care hospitals that combined have 3,200 beds in addition to outpatient centers, physician office building and home health facilities in the Chicago area, the Bloomington-Normal area, and Eureka region.

Its latest expansion move came last month when it announced the signing of a letter-of-intent to acquire the independent Elgin-based Sherman Health System which operates in the far west and northwest suburbs of Chicago. After a due-diligence period, the deal is expected to close in May or June.

Details on how the merger would impact Sherman’s $285 million of outstanding debt have not been decided. “It’s too early to say and will be part of the due diligence process,” Nakis said.

Sherman suffered a series of downgrades after it more than doubled its debt in 2007 to finance its new hospital which opened in 2009. The hospital’s balance sheet has since stabilized.

Standard & Poor’s recently affirmed the system’s BBB rating and stable outlook. Moody’s rates Sherman Baa2 rating with a stable outlook. Sherman generated $308 million in revenue last year.

“Although we believe that AHCN could absorb Sherman Health into its credit profile, we will more fully evaluate that transaction as it is finalized. We do not anticipate any additional new money debt issuances during the next one to two years,” Standard & Poor’s said in its new review of Advocate’s credit.

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