—DALLAS Ratings analysts are awaiting details on the debt structure of the combined St. Luke's Episcopal Health System of Texas and Colorado-based Catholic Health Initiatives before issuing an opinion on the $2 billion deal.
"No decisions have yet been announced about whether there will be changes to the debt security structure of St. Luke's or CHI as a result of the merger," said Standard & Poor's analyst Liz Sweeney. "Our rating on St. Luke's will likely depend on whether there will be changes to the security pledge once St. Luke's becomes part of CHI."
CHI, one of the largest faith-based health-care systems in the country, will gain entry into the Texas market with the acquisition. For St. Luke's, the deal concludes an 11-month search for a merger partner amid rapid consolidation of health systems in the nation.
With both health care giants rated AA-minus by Standard & Poor's, last week's announcement of the merger will have no immediate impact, Sweeney said. Outlooks on both nonprofits are stable.
S&P lowered the ratings on CHI to AA-minus from AA last year, citing aggressive acquisitions of health systems with $1.5 billion of taxable debt. St. Luke's had about $821 million in debt outstanding in 2012, according to S&P.
"In our view, this transaction is in keeping with our expectations in last year's downgrade," Sweeney wrote about the St. Luke's deal. "However, this transaction uses a significant amount of CHI's financial flexibility and will limit its ability to pursue other acquisitions without further financial dilution."
In advance of the $1.5 billion CHI issue, Moody's Investors Service downgraded the health care system to Aa3 from Aa2 on Oct. 23 and restored the outlook to stable. They have not yet rated this deal.
Under terms of the deal, CHI will contribute more than $1 billion to create a new Episcopal Health Foundation, which will focus on the unmet health needs of the Houston area's underserved population.
CHI has committed an additional $1 billion for future investment in the health system.
The agreement includes St. Luke's Texas Medical Center campus, as well as suburban hospital locations in The Woodlands, Sugar Land, Pasadena and The Vintage. The merger is expected to be completed this summer, executives said.
A 2006 plan to merge St. Luke's with Baylor College of Medicine fell through, leaving St. Luke's still searching for a partner.
