DALLAS — Texas Health Resources — in danger of a credit downgrade last year because of its handling of a deadly Ebola case — has now earned an upgrade en route to the municipal market with $360 million of bonds.
Moody's Investors Service lifted the rating to Aa2 from Aa3 on April 15, saying the health system's financial performance has returned to its pre-Ebola trajectory.
"The upgrade also reflects our expectation that liquidity will continue to grow given performance and disciplined capital spending," analyst Lisa Goldstein wrote.
Texas Health chief executive Barclay Berdan called the upgrade "great news for Texas Health and a reflection of the hard work and outstanding accomplishments of people throughout our health system to improve patient care and operations while managing costs."
Standard & Poor's affirmed its AA rating and maintained a stable outlook.
S&P analyst Kevin Holloran said the rating "reflects our view of Texas Health's continuation of very good operating results, maintenance of unrestricted liquidity, leading market share, and capable management team."
The bonds, issued via the conduit Tarrant County Cultural Education Facilities Finance Corp., consist of $60 million in tax-exempt debt and a $300 million taxable series.
The negotiated pricing through book-runner Morgan Stanley and co-managers Bank of America Merrill Lynch & Co. and Estrada Hinojosa & Co. is scheduled April 29.
H2C Securities Inc., a consulting firm that specializes in the health care sector, is financial advisor on the deal.
Bracewell & Giuliani is bond counsel.
Proceeds of the issue will be used for construction, renovation, and expansion projects among THR hospitals.
Texas Health Resources is the largest healthcare system in the four-county Dallas-Fort Worth area with 24 acute care and short-stay hospitals. After this deal, THR will have $1.6 billion of rated debt outstanding, according to Moody's.
"Debt service coverage and leverage metrics are favorable with a manageable increase in leverage following the proposed financing," Goldstein wrote.
Texas Health Presbyterian in Dallas, the hospital that became the subject of international press coverage when the Ebola case was diagnosed in October, is facing a lawsuit from one of its former nurses who contracted the disease.
"The outlook also reflects adequate insurance coverage and the satisfactory review of regulatory bodies following the Ebola event," Goldstein wrote.
On April 7, Texas Health Presbyterian named Jim Berg as president; he had been interim president since August 2014. Berg joined the organization in 2007 as senior vice president and chief operating officer and ran the hospital during the Ebola event.
Other hospitals in the system include Texas Health Arlington Memorial between Dallas and Fort Worth, and Texas Health Harris Methodist and Texas Health Huguley Hospitals in Fort Worth.
The system also includes the Texas Health Physicians Group, outpatient facilities, behavioral health and home health, preventive and fitness services, and an organization for medical research and education.
Harris Methodist Hospital is the largest generator of revenue for the system, accounting for 18.5%, according to Moody's. Dallas Presbyterian ranked second with 15.5%.
"While volumes declined at Texas Health Presbyterian Hospital Dallas following the [Ebola] event, the other system hospitals maintained steady and increasing volumes," Goldstein wrote. "System admissions increased 2% in FY 2014 over FY 2013 although surgeries declined, indicative of the competitive market."
THR's chief rivals the Dallas-Fort Worth area are the nonprofit Baylor Scott & White Healthcare and for-profit HCA.
"There are few independent hospitals remaining in the Metroplex given the consolidation activity over the past two decades," Goldstein wrote. "The strong population growth should continue to benefit all of the providers although it also drives capital spending and partnerships with various providers."
In addition to competition, risk factors for bond investors in the healthcare sector are numerous, as noted in THR's preliminary official statement.
One factor that could have a sudden impact is a pending U.S. Supreme Court decision that could disallow federal subsidies for private health insurance in Texas and 36 other states that did not create their own exchanges. The case hinges on whether Congress intended to provide federal subsidies only for states that set up their own exchanges.
A Supreme Court decision is expected by late June.
"If the U.S. Supreme Court were to find that subsidies are not legally available in the 37 states with federally-facilitated exchanges, the viability of these exchanges could be impacted, including the one in Texas," according to the POS.
About 31%, of THR's patient service and premium revenues were derived from the federally funded Medicare program and the federal and state funded Medicaid program in their most recent fiscal year, according to the POS. Plans to reduce federal Medicare spending under the health care reform laws "could negatively affect the system in a manner and to an extent that cannot be fully predicted," the POS said.
With over $4 billion in revenues in FY 2014, the system was able to weather the Ebola event without major disruption in performance, analysts said.
"Disclosure to Moody's during the Ebola event was clear and timely," Goldstein wrote. "FY 2014 performance indicates that the organization continued its trajectory of strong financial results without a material diminution in fiscal health."
On Oct. 22 and Dec. 19, 2014, THR issued disclosures about Presbyterian Dallas' treatment of Thomas Eric Duncan, a Liberian who died of Ebola at the hospital Oct. 8 after he was initially sent back to his family members in Dallas with antibiotics.
Two Presbyterian nurses who treated Duncan, Nina Pham and Amber Vinson, contracted the disease but survived after they were moved to hospitals that specialized in treating exotic infectious diseases.
The Dec. 19 statement confirmed that revenues for the month of October were down about 25% or $12.2 million as the events were unfolding. The daily patient census was down about 22%.
Emergency room visits fell 49% in October as ambulances were diverted to other hospitals for two weeks. Through Dec. 15, emergency room visits were 3.7% lower and the daily census was down 2.3%.
Since then, health officials have declared that the threat of the disease spreading from those initial contacts is over.
Pham filed a lawsuit March 2, claiming that the hospital failed to protect her from the disease and used her treatment for its own public relations purposes.
The lawsuit, filed by prominent Dallas litigator Charla Aldous, calls Pham "a casualty of a hospital system's failure to prepare for a known and impending medical crisis."
THR said it "has adequate legal defenses and insurance coverage for this matter, and management estimates that it will be resolved without material adverse effect on the system's future financial position, results of operations, or cash flows."
The Ebola case was a painful blow to the reputation of a hospital that had treated former President George W. Bush and garnered support from some of the Dallas area's most prominent families.
Presbyterian's maternity wing is named for Margot Perot, the wife of the technology magnate and former presidential candidate Ross Perot.
The board chairwoman at the hospital's parent company, Texas Health Resources, is Anne T. Bass, the wife of billionaire investor Robert M. Bass of Fort Worth.
In the wake of the event, the hospital has adopted new practices and applied lessons learned, officials said.
"Texas Health Dallas was the first to face a situation that few hospitals in the country have been ready to manage," the Dec. 19 disclosure statement said.
