Advocate Aurora's first new rating lands in low, double-A territory

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CHICAGO — The newly formed Advocate Aurora Health received mixed first-time ratings.

Moody’s Investors Service assigned a first-time rating of Aa2 that reflects the weight of one partner’s weaker balance sheet on the other’s stronger profile while Fitch Ratings gave the merged system a AA rating, the same as currently carried by the higher-rated partner. S&P Global Ratings has not published its report.

Advocated Aurora Health — created April 1 by the merger of Illinois' and Wisconsin’s largest systems — sought initial ratings as it prepares to refund and restructure Aurora’s existing $1.2 billion of debt in a taxable and tax-exempt, long mode floating- and fixed-rate sale early next month.

The Wisconsin Health and Facilities Authority will issue up to $950 million of tax-exempts for the system.

Moody’s Investors Service assigned an Aa3 to the new system, upgraded Milwaukee-based Aurora’s debt to Aa3 from A2 and downgraded Downers Grove, Illinois-based Advocate’s existing debt to Aa3 from Aa2.

Aurora’s rating will be withdrawn after the deal as an amended and restated master trust indenture that updates Advocate’s existing MTI takes effect. It will reflect the two systems’ combined balance sheets supporting the debt.

“The Aa3 acknowledges the size and scale Advocate Aurora will have as a market leader over a large geographic service area, potential to capitalize on synergies related to core infrastructure, purchasing and materials management, a strong liquidity position … both legacy organization's demonstrated history of successful operations and absorption of growth, and anticipated savings that will be achieved from the debt refinancing,” Moody’s said.

Moody’s said it has factored in challenges posed by integration, risk as the two merge operations, fierce competition in rapidly consolidating markets and revenue slowdowns due to pricing pressure and unfavorable payer-mix shifts, particularly in the Illinois region.

The system carries top short-term marks of VMIG-1. “The stable outlook reflects the stature and footprint of the newly combined organization that underpins our expectation the combined financial profile will remain at least at current levels,” Moody’s added.

Fitch on Friday assigned an AA rating to the new system and upcoming issue, affirmed Advocate’s AA ratings, and upgraded Aurora’s bonds to AA from A-plus.

“The long-term 'AA' rating on Advocate Aurora Health is driven by the system's very strong financial profile assessment, leading market position over a broad and diversified service area covering the population centers of two states (albeit with competition in many key markets), and expectations for maintenance of strong operating profile,” Fitch said. “The stable rating outlook reflects Fitch's expectation that AAH will sustain strong capital-related ratios through the cycle in the rating case of Fitch's FAST scenario analysis, consistent with the combination of mid-range revenue defensibility and strong operating risk profile."

Combining the debt into an amended MTI will streamline administrative functions and result in cost savings, Advocate’s longtime chief financial officer Dominic Nakis, now CFO of the combined systems, said in a recent interview.

Thanks to current interest rates, 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, 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. Advocate has about $1.5 billion of debt.

The system tentatively expects to price the bonds on Aug. 6. The new system has requested ratings from Fitch Ratings, Moody’s, and S&P Global Ratings.

S&P 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.

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.

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