Advocate Aurora Health system readies post-merger refunding

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CHICAGO – Advocate Aurora Health plans its first bond sale – an up to $1.2 billion refunding of its Wisconsin debt – since the merger of the largest not-for-profit health systems in Illinois and Wisconsin’s largest not-for-profit health systems earlier this year.

Illinois-based Advocate Health Care and Wisconsin-based Aurora Health Care finalized their marriage on April 1.

The final size and structure including the tax-exempt and taxable tranches of the planned sale is not yet final, but significant cash flow savings are expected as part of a restructuring that will push out the near-term repayment of Aurora’s debt, said Advocate’s longtime chief financial officer Dominic Nakis, now CFO of the combined systems.

The system will issue up to $950 million of tax-exempt debt with an additional taxable tranche that could bring the deal up to $1.2 billion.

“We will be combining the debt into Advocate’s master trust indenture which will be amended and restated to reflect the merger," Nakis said in an interview.

Combining the debt into an amended MTI will streamline administrative functions and result in cost savings. Extending Aurora’s debt beyond its current average life of nine-and-a-half years will generate $250 million in cash flow savings over the first five years without adding to overall debt repayment because of current interest rates, Nakis said.

Advocate’s average life is at 18 years. The overall debt structure of the systems is still being reviewed, but there’s no major Advocate debt restructuring currently on the table.

The system tentatively expects to price the bonds on Aug. 6. JPMorgan and Citi are senior managers.

The Wisconsin Health and Educational Facilities Authority will sign off on the transaction at its Aug. 1 meeting, said the authority’s executive director, Dennis Reilly.

The new ratings that will result from fresh, post-merger reviews are uncertain. The new system has requested ratings from the three largest rating agencies.

S&P Global Ratings earlier this year shifted its outlook on Advocate’s AA-plus rating to negative from stable. It does not rate Aurora.

"The negative outlook reflects our assessment of the AHCN's pending consolidation with Aurora Health Care” with the combined balance sheet, while still very strong, meaningfully weaker than current metrics shown by AHCN, analyst Suzie Desai said in the report.

S&P said there’s a one-in-three chance the rating could drop one notch to AA due primarily to meaningful balance-sheet dilution, including higher debt levels.

The merger has positives, S&P said, including strengthening the combined systems’ “enterprise profile” with improved operating income. Aurora's recent operating margins are stronger than those of AHCN, which has experienced slight declines in recent years

“While we view significant opportunities and strengths related to the affiliation, there could be some stress to the rating if we don't see that the combined entity can achieve meaningful benefits -- both strategic and operational -- in the next couple years,” S&P added.

The rating agency could restore the stable outlook if management demonstrates the benefits of the larger organization, including benefits from possible refunding and debt restructuring, and continues to sustain operating performance consistent with recent trends in order to compensate for the lighter combined balance sheet.

Advocate has about $1.5 billion of debt. In a September report, Moody’s Investors Service affirmed its Aa2 rating based on Advocate's size, good geographic diversity, very strong liquidity that allows absorption of delays in state Medicaid payments, moderate leverage and very good debt metrics even during lower performance.

Aurora carries single-A ratings on about $1.3 billion of debt. Fitch Ratings upgraded the system in 2016 to A-plus saying it was due to “sustained operating profitability through interim 2016, which reflects strong cash flow ahead of historical levels.”

The merger, announced in December and approved by state and federal regulators earlier this year, created the 10th-biggest nonprofit hospital operator nationally.

The system operates 27 hospitals, employs more than 3,300 physicians, and has combined annual revenues of $11 billion. Advocate is the largest system in Illinois with 12 hospitals in Chicago, the suburbs, and central Illinois, while Aurora has 15, mostly in southern Wisconsin.

The system is led by a single board with equal number of members from Advocate and Aurora and the current heads of each system serving as co-chief executive officers – Aurora’s CEO Nick Turkal and Advocate’s CEO Jim Skogsbergh.

The Advocate and Aurora names continue to be used locally and each system will maintain its current headquarters. Advocate is based in the Chicago suburb of Downers Grove and Aurora is based in Milwaukee.

The two have little overlap in their regional footprint. The healthcare sector has seen a wave of consolidation as systems adjust to federal healthcare reforms and larger scale operations help reduce costs and dilute payor dependencies.

The merger followed Advocate’s failed attempt to join forces with NorthShore University HealthSystem in 2016. The two dropped their efforts after court rulings backed the Federal Trade Commission’s efforts to block the combination. The FTC argued it would harm consumer pricing and violate antitrust rules. Talks with Aurora began after Advocate abandoned the NorthShore merger.

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Primary bond market Not-for-profit healthcare M&A Wisconsin Health & Educational Facilities Authority Advocate Health Care Wisconsin Illinois