CHICAGO – Chicago-based Presence Health Network will issue nearly $1 billion of bonds next week in a sale designed to overhaul its debt portfolio and provide some breathing room to help stabilize its balance sheet.
The Presence deal leads a total of $1.6 billion of debt issuance that received approval from the Illinois Finance Authority board last week as borrowers rush to take advantage of the record low interest rates.
The state conduit issuer's board also approved the selection of an underwriting team for a new state revolving fund transaction, handing the books to Bank of America Merrill Lynch.
Presence will use proceeds of deal, expected to sell as fixed rate, along with existing debt service reserve funds being freed up, to refinance all of its existing debt.
The refinancing completes a process begun in the spring when the system sought a bank loan in a short-term debt restructuring to deal with covenant violations.
Presence's 2015 operating results triggered technical covenant violations on coverage ratios that could have forced accelerated debt repayment.
The upcoming refinancing will result in "profound" savings by reducing annual debt service demands and "dramatically reduce any event risks" as the system pursues turnaround initiatives, Presence president Michael Englehart told IFA board members.
New management took over the system in late 2015, led by Englehart. The new team launched a fiscal review resulting in accounting adjustments that hurt 2015 operating results.
After a round of rating downgrades that left the system at the brink of junk status, Presence was affirmed ahead of next week's deal, although rating agencies warn that the system is not yet out of the woods.
"There's a lot of credit work that goes into a transaction like this and ultimately it depends on if the buyer thinks it priced right but there is an appetite for this type of credit," said Adam Buchanan, a senior vice president in Ziegler's institutional sales and trading group.
"It's the right market for this type of transaction," Buchanan said, citing investors' eagerness to buy-lower grade credits in exchange for higher yields.
He noted the success of the California Statewide Communities Development Authority's $948 million sale for the junk-rated Loma Linda University Medical Center this spring.
The Presence Health bonds are secured by a pledge of gross revenues of the obligated group and mortgages on eight Presence obligated facilities under a new master trust indenture.
The IFA board had expedited approval during a special meeting in late May of a $530 million variable-rate, short-term financing and changes in the system's master trust indenture that staved off potential liquidity demands.
JPMorgan directly purchased the securities, taking out other banks on the existing financing.
The firm is underwriting the upcoming transaction and Kaufman Hall is financial advisor while Chapman and Cutler LLP is bond counsel.
The system's credit has tumbled this year, and the short-term debt restructuring fell short of fending off a hit from Moody's Investors Service, which last month downgraded the not-for-profit healthcare system's issuer rating one notch to Baa3, the lowest investment grade level.
S&P Global Ratings in March lowered the system two notches, to the lowest investment grade level of BBB-minus.
Fitch Ratings lowered the system's rating one notch to BBB, also in March. Both had the credit previously on rating watch but now assign a negative outlook.
"The rating reflects our view of the network's 12 hospitals and large physician network, as well as its solid business position in the Chicago metro area with a substantially new management team that is focused on improving operations," said S&P analyst Suzie Desai.
In affirming the rating, Fitch noted the restructuring's benefits that will "bring meaningful debt service relief in the near term" which analysts said they believe "is key as Presence navigates its turnaround effort."
No new borrowing is expected over the near term.
"The rating affirmation reflects Fitch's belief that Presence will return to better than breakeven operating margin by fiscal 2017, via a turnaround effort led by a largely new management team," Fitch said.
Through May 31, Presence was ahead of its projections with a negative 2.5% operating margin and debt service coverage of 1.8 times.
Maximum annual debt service hits $73 million in 2020, down from $92 million and debt service requirements from 2017 to 2019 are modest at $47.6 million, analysts said. An operating loss of $56 million is expected in 2016.
While offering positive comments on the turnaround plans, the rating agencies all assign a negative outlook.
"The negative outlook reflects Fitch's concern regarding balance sheet erosion, which could erode further, should operating losses continue," Fitch said.
"The outlook reflects our view of Presence Health's continued operating losses in fiscal 2016 coupled with a weaker balance sheet that has limited room for sustained losses at the levels seen in fiscal 2015 and through interim 2016," S&P's Desai said.
"Although proposed to improve with this restructuring, headroom to financial covenants remains a credit risk given current operating pressures," Moody's said in its new report.
"Failure to materially improve operating performance over the next 12 to 18 months, in line with budgeted expectations, and to abate balance sheet dilution, would likely result in a downgrade," Moody's said.
Presence Health Network was created in 2011 with the merger of Provena Health and Resurrection Health Care. It's the largest Catholic health system based in Illinois and generated $2.6 billion of revenues annually.
The system also has established a $75 million revolving credit facility, which carries a parity obligation under the new master trust indenture.
Presence has stressed to investors its $900 million in cash and investments, its up-to-date payment of all scheduled principal and interest payments, its turnaround efforts, and the assistance of advisors including Crowe Horwath, Huron Healthcare and Xtend Healthcare.
In other action at the IFA's July board meeting, members approved a financing team led by BAML on a new state revolving deal.
Citi would serve as the co-senior and five firms were selected for the roles of co-managers: Jefferies, Loop Capital Markets, Piper Jaffray, Ramirez & Co., and Siebert Brandford Shank.
The selections were made after a competitive state procurement process.
IFA Executive Director Christopher Meister said the authority was "still developing" the size and timeline but told board members "we are looking at a significantly larger financing" that would put all the firms selected to use. The IFA last sold SRF debt in 2013 in a $140 million deal.
Market sources said the agency was aiming for a fall sale and was looking at between $300 million and $800 million of issuance due to demand for the low-cost loans offered through the state program.
The board also signed off on the Art Institute of Chicago's plan to advance refund up to $47 million of 2009 debt.
The museum carries underlying ratings of A1 from Moody's Investors Service and AA-minus from Standard & Poor's. JPMorgan is senior manager and Loop co-manager.
The refunding will "reduce monthly payments that will help the Art Institute of Chicago keep its fixed charges (including debt service payments) as low as possible" and "pay for various ongoing instructional and academic services as well as curatorial, library and collection services," IFA documents said.
The unrated Mount Carmel High School received approval for an up to $22 million sale to refund 2003 debt and finance new projects.
Wintrust Bank will directly purchase the bonds.
The Newman Foundation at the University of Illinois received approval to refund up to $40 million of 2007 debt that financed a student housing facility. PNC Bank will directly purchase the securities.
Kankakee-based Riverside Health System received approval for an up to $90 million sale that will raise new money and refund 2006 and 2009 bonds. The system carries an A2 Moody's rating and an A-plus S&P rating. Barclays is the senior manager.
A senior living center, the Moorings of Arlington Heights, received preliminary approval for its sale of up to $70 million to fund construction of a 27,000-square-foot resident commons area and to expand its living quarters and its memory care facilities. First Midwest Bank and Huntington Bank will directly purchase the unrated bonds.
The board also signed off on Peoria-based OSF Healthcare System's up to $120 million refunding of 2010 bonds. Barclays is the underwriter.
The system carries a Moody's A2 rating and an A rating from S&P.
