Advocate Health Care and the financially struggling Condell Medical Center announced plans last week to enter into an exclusive agreement to negotiate a merger.

The announcement followed Condell’s rejection of a possible merger with Lake Forest Hospital. Advocate is based in Oak Brook, just west of Chicago, and is the largest health care provider in the region, operating eight hospitals. Condell is a 250-bed facility located in Libertyville, about 25 miles north of Chicago.

The merger would allow Condell to shore up its struggling finances and provide it access to capital funding, while allowing Advocate to extend its market reach without having to build a new facility. Advocate had been considering building a new $250 million hospital near Condell in Lake County.

A joint statement from the hospitals said the marriage would allow “both not-for-profit health providers to strengthen and align their missions of serving the needs of individuals, families, and communities through exemplary patient care.”

Fitch Ratings late last week after the announcement said it would maintain the negative watch assigned to Condell’s BBB rating on $125 million of outstanding debt sold in 2002 and 2000. The hospital is struggling to turnaround its finances.

“Fitch will take further rating action on Condell’s outstanding bonds if, and when, a formal merger agreement is reached, and-or further financial and operational information is received,” analysts wrote.

The negative watch assigned last June reflects Condell’s failure to disclose its finances in a timely fashion, an extremely weak liquidity position, and the termination of Condell’s managed care contracts with Blue Cross Blue Shield of Illinois on Oct. 1, 2007.

The watch was assigned specifically in response to Condell’s announcement last year that it had completed an internal investigation that identified errors or misstatements in its previously issued financial statements.

Condell delayed the release of its fiscal 2006 results until December because of those problems, and Fitch analysts said they remain concerned because their “access to management as well as additional credit information has been limited.”

All three rating agencies affirmed Advocate’s short-term and long-term double-A ratings on nearly $800 million of debt in conjunction with its sale last fall of $500 million of new-money and refunding bonds. Fitch rates the system AA-minus and the short-term debt F1-plus. Moody’s Investors Service rates the system Aa3 and the short-term debt VMIG-1. Standard & Poor’s rates the system AA and the short-term debt A-1-plus. Advocate carries a stable outlook from all three agencies.

Moody’s rates Condell Baa2 and is also reviewing the credit for a possible downgrade. Condell does not hacve a current Standard & Poor’s rating.

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