Regional News

Illinois Finance Authority Advances Health Care Merger Bonds

CHICAGO — The Illinois Finance Authority on Tuesday advanced St. Louis-based Ascension Health Alliance’s plans to issue up to $600 million of new-money and refunding debt tied primarily to its recent acquisition of Alexian Brothers Health System in suburban Chicago.

Ascension Health Alliance, which changed its name from Ascension Health last year, extended its national reach into the Chicago region with its acquisition of the Arlington Heights, Ill.-based Alexian Brothers at the end of the year.

The two first announced their intent to merge in April and then signed a definitive agreement advancing the union in September. Alexian sought deeper pockets to address capital needs and manage through federal health care reform. “This partnership will help to provide us with the resources needed to grow as health care changes,” Mark Frey, ABHS’s executive vice president, said in a statement at the time.

The Alexian system, founded in 1866, operates three Chicago-area hospitals and senior-living and other health care facilities in Missouri, Tennessee, and Wisconsin that together generate $1 billion in annual revenue. Ascension acquired its roughly $450 million of single-A rated debt rated as part of the merger.

Ascension is the nation’s largest nonprofit health care provider, with 68 acute-care hospitals and nine specialty hospitals operating in 20 states and the District of Columbia. The system generates $15.5 billion in annual operating revenue, has more than $4 billion of outstanding debt that carries high double-A ratings, and is known for its sophisticated debt management.

The IFA board at its monthly meeting Tuesday gave preliminary approval to Ascension’s transaction that would pay off the Alexian debt and refund other existing debt, including commercial paper used to fund projects and the Alexian acquisition costs. It would also raise up to $175 million in new-money proceeds to fund projects at the Alexian facilities.

The system anticipates selling in late winter or early spring, using a structure that includes a combination of fixed-rate debt, put bonds, and various forms of variable-rate demand bonds. The refunding could include a portion of Ascension’s outstanding debt issue through the Indiana Health Facility Financing Authority, the Escambia County Health Facilities Authority, and the Jacksonville Health Facilities Authority. The system anticipates additional new-money and refunding issuance in the fall, according to IFA documents.

Citi and Morgan Stanley are underwriters. Kaufman Hall is financial advisor and bond counsel is Orrick Herrington & Sutcliffe LLP.

Moody’s Investors Service recently affirmed Ascension’s P-1 rating on its commercial paper program in conjunction with an increase in its capacity to $1 billion from $250 million to retire all or a portion of Alexian’s debt as it worked on long-term financing plans.

The system’s short-term rating reflects strong treasury management of a long-established self-liquidity program and large portfolio of diversified investments. The system has no bank exposure through liquidity support or letters of credit.

Moody’s rates the system’s long-term debt Aa1 with a negative outlook, which it applied last May. The rating recognizes the system’s status as the largest nonprofit system, large portfolio of sizeable hospitals with geographic and cash-flow diversity, and prominent market positions in individual markets.

The system's primary challenges that drive its negative outlook “include a multi-year trend in declining operating margins, a concentration of revenues in Michigan, competition in most markets that has contributed to volume declines in certain markets, cuts in government reimbursement, and short-term risks and costs related to a major enterprise resource project,” Moody’s wrote.

The union is the latest in a national consolidation trend as hospital systems seek to bolster their capital positions and trim costs as they navigate the challenges of federal health care reform. Industry participants see the consolidation trend escalating as the nonprofit sector’s challenges favor larger economies of scale.

Illinois has seen a surge of mergers of late. 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 are merging. Trinity Health recently acquired the two-hospital Loyola University Health System in suburban Chicago and is expected to also acquire Chicago-based Mercy ¬Hospital.



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