CHICAGO - St. Louis-based SSM Health Care heads into the market Wednesday with an up to $260 million sale that represents one piece of a roughly $1 billion debt restructuring aimed at streamlining and trimming the system's annual interest costs.
"Our strategy is to lower the overall cost of capital while also simplifying the structure and retaining flexibility," said SSM system treasurer and chief investment officer Mike Malewicz.
The Catholic nonprofit system expects to shave $12 million off its debt service costs by dropping bank liquidity support and extending some maturities. The restructuring also will simplify reporting requirements.
Ahead of the sale, Fitch Ratings affirmed SSM's AA-minus rating and stable outlook while Standard & Poor's downgraded the system one level to A-plus primarily due to operating losses in fiscal 2013 that resulted in lower debt service coverage ratios.
Standard & Poor's assigned an A-1 rating to the short-term pieces it was asked to rate and Fitch assigned an F-1-plus rating.
The $260 million publicly issued fixed-rate issuance will refinance existing variable-rate demand securities from 2005 and 2010.
Goldman Sachs is the senior manager and Citi is co-senior manager with a handful of other firms rounding out the syndicate.
The Missouri Health and Educational Facilities Authority is serving as conduit. Ponder & Co. is advising SSM and Gilmore & Bell PC is bond counsel.
Malewicz and finance team members are spending the early part of the week meeting with investors in New York City and Boston in a roadshow aimed at updating market participants on the SSM system.
It underwent a dramatic expansion with its acquisition last year of Wisconsin-based Dean Health System.
"We are a completely different system and have a great story to share," he said. The Dean acquisition adds $1 billion in annual revenues to SSM's coffers.
SSM is also issuing another $300 million of variable-rate demand bonds in various modes including weekly, commercial paper, and windows. It's directly placing another $160 million with UBS and Union Bank.
SSM will use $400 million from those pieces to pay off a taxable loan from Citi tied to Dean acquisition costs.
The other $60 million represents the only new money being raised in the various tranches of issuance SSM is undertaking.
"The loan provided interim financing and now we are going to do a permanent structure," Malewicz said.
The system also has direct placements planned with JPMorgan and PNC Bank restructuring its remaining 2010 debt.
SSM also is initiating a $200 million taxable commercial paper program and expects to draw $175 million to retire remaining Dean Health related debt. Malewicz said SSM is using a taxable structure to preserve "flexibility for the future." JPMorgan will serve as remarketing agent.
The need to retire the $400 million bridge loan, which comes due over the summer, prompted the overall review of SSM's debt portfolio, said Malewicz, who took the position managing the systems' debt seven months ago.
He previously worked at City of Hope in Duarte, Calif.
Standard & Poor's had praise for the system's long-term plans but downgraded the rating over recent losses.
The system saw a $74 million loss in fiscal 2013.
Total operating revenue increased 81% to $4.6 billion in fiscal 2013 from $2.5 billion in fiscal 2008. Operating profitability declined due to both recurring and non-recurring items. They included a $61.2 million settlement over disproportionate share hospital payments from the federal government and the assumption of $6.7 million in liabilities from its acquisition of the Audrain Medical Center.
"The rating action reflects our view of SSMHC's overall lighter financial profile and higher debt service, which together lead to lighter pro forma debt service coverage," said Standard & Poor's analyst Suzie Desai.
The rating is supported by SSMHC's strong enterprise profile with good revenue dispersion across four states and a strong strategic position in its markets.
The stable outlook reflects analysts' view of SSM's strengths in its various markets and solid unrestricted reserves. It also reflects a detailed turnaround plan that Standard & Poor's said is anticipated to generate positive operating performance in fiscal 2014 and contribute to improved debt service coverage.
Fitch noted the 2013 losses but cited SSM's identification of $200 million in annual cost reduction including $175 million in fiscal 2014 as an offsetting factor.
Non-hospital revenues increased from 11% of total revenue to 35%. The increase is primarily due to insurance premium revenue from the Dean Health Plan. Management plans to roll out the DHP platform across all of its regions in the mid-term and expects non-hospital operations to grow at a faster rate than hospital revenues.
"SSM has made significant capital investments to create a multi-state integrated delivery network," Fitch analysts wrote. The most substantial investment was the acquisition of Dean which added over $1 billion in operating revenue, a large multi-specialty physician practice, a managed care organization, and a pharmacy benefits management company to SSM's already large operating platform.
"Fitch views SSM's integrated delivery network strategy favorably and believes that it will better position the organization financially in a post-reform healthcare environment," analysts wrote.
Fitch considers SSM's debt burden manageable with pro forma maximum annual debt service equal to 2.4% of 2013 revenue and liquidity is adequate with 216 days cash on hand.
SSM's eligible cash and investment position under Fitch's criteria would cover the maximum mandatory put on self-liquidity bonds on any given date in excess of Fitch's 1.25 times threshold for its rating.
SSM has operations in Missouri, Illinois, Wisconsin and Oklahoma.
It operates 18 acute care hospitals, one children's hospital, two long-term care facilities, 14 convenient care locations and a network of physician practices with 175 clinics and 1,300 employed and affiliated physicians.
Madison, Wis.-based Dean became a wholly owned subsidiary of SSM on Sept. 1. DHS is a large multi-specialty physicians group operating over 60 clinics and 500 affiliated physicians throughout southern Wisconsin.
Four months of DHS operations are included in SSM's fiscal 2013 consolidated financial results.
SSM's debt will total about $1.9 billion after its new issuance and restructuring. That's up from $1.3 billion at the time of Fitch's last review in April 2013, analysts said.
SSM's debt portfolio includes 39% fixed rate, 36% synthetically fixed and 25% in variable structures. SSM is counterparty to eight fixed payor swaps with a total notional amount of $653 million and varying collateral posting requirements, Fitch said.
