DALLAS — In a complex, multi-state, multi-series issue, Catholic Health Initiatives expects to price about $1.2 billion of taxable and tax-exempt debt this week for its rapidly expanding nonprofit hospital network.

The largest tranche of the deal includes $601.75 million of revenue bonds to be priced Wednesday by Morgan Stanley & Co. That portion of the deal includes $243.44 million by the Colorado Health Facilities Authority, $81.54 million from the Kentucky Economic Development Finance Authority, $205 million issued by the Health, Educational and Housing Facility Board of the City of Chattanooga, Tenn., and $71.58 million from the Washington Health Care Facilities Authority.

Morgan Stanley will also price a $71.48 million series for Catholic Health on Wednesday. The smaller financing consists of $19.34 million issued by the Colorado Health Facilities Authority, and $25 million and $27.14 million, both from Montgomery County, Ohio.

In addition to the tax-exempt debt, Colorado-headquartered Catholic Health will also issue $553.6 million of taxable revenue bonds.

The bond proceeds will provide long-term funding for about $650 million of prior capital outlays, refund outstanding CHI bonds and debt assumed with the acquisitions of hospitals in Texas and Washington in fiscal years 2013 and 2014, and pay the costs of issuance.

The issue comes in a healthcare market fraught with changes and economic uncertainty that have lowered in CHI's long-term ratings over the past year.

Standard & Poor's downgraded CHI to A-plus from AA-minus ahead of this week's deal, citing weak operating performance and increased debt.

"The operating loss, in conjunction with new-money borrowing, results in pro forma debt service coverage that is weak even for the new rating, and will need to improve to maintain the A-plus rating," said Standard & Poor's credit analyst Liz Sweeney.

Moody's dropped CHI to A1 from Aa3, a year after the last downgrade from Aa2.  Even at the lower rating, Moody's maintained a negative outlook.

"The negative outlook reflects concerns with the sizable decline in operating performance in FY 2013 that will require marked improvement to return to historical levels of performance," wrote Moody's analyst Kay Sifferman. "CHI is managing several initiatives at once that will occupy management resources, including entry in a new market, downturn in operations in several markets simultaneously, and information technology implementations. The sizable increase in debt load over the past two years has weakened debt metrics unfavorably to medians."

Catholic Health Initiatives was one of three large health systems that shared in a record level of downgrades by Moody's Investors Service in 2012. The $20 billion in downgraded healthcare debt represented an increase of 213% from the $6.4 billion lowered in 2011.

Moody's downgraded CHI on Oct. 17, 2012, to Aa3 from Aa2 in advance of a $1.5 billion taxable debt issue, as did S&P and Fitch Ratings.

With this deal, Fitch Ratings issued its second downgrade in a year, dropping CHI to A-plus from AA-minus but providing a stable outlook.

"While the rating incorporates the expectation of some pressure to operating profitability as the system executes its strategic plan, inability to return to stronger profitability may lead to further rating pressure," Fitch analyst Jennifer Kim said.

Headquartered in the Denver suburb of Englewood, CHI is the third largest not-for-profit healthcare system in the U.S. The system manages 30 regional systems in 17 states, including 87 acute care hospitals, numerous long-term care, assisted living and residential facilities, two community health service organizations, and two nursing colleges.

CHI reported $10.6 billion in total operating revenues in the fiscal year ended June 30, 2013.

Anticipating the federal Affordable Care Act, expansion of Medicaid in many states and changes in health insurance rules, Catholic Health has been on an acquisition binge over the past year.

In April, the Episcopal Diocese of Texas approved the transfer of St. Luke's Episcopal Health System to Catholic Health Initiatives in a $2 billion deal.

CHI's record $1.5 billion of taxable Series 2012 bonds financed acquisition of the remaining interest in Alegent Creighton Health, expansion strategies with PeaceHealth, ambulatory care and physician expansion strategies, and technology updates.

Last year's deal was the first time that CHI issued long-term, fixed-rate taxable bonds. Officials said that taxable bonds could be issued more quickly through the market than most tax-exempt bonds, providing streamlined access to capital for both nonprofit and for-profit business lines and services.

"We consider this an essential investment in our future," Kevin Lofton, CHI's president and CEO, said in a statement after last year's taxable deal.

Upon closing of the series 2013 financing, CHI's pro forma debt is expected to total roughly $8.4 billion including $442.5 million of commercial paper. The debt is up from a total of $7.4 billion at the end of fiscal year 2013 and $4.7 billion at the end of fiscal year 2012, according to Fitch.

"Fitch views CHI's size, scale and geographic diversity as positive credit factors, which allow for greater economies of scale and efficiency as well as providing a certain level of insulation from negative changes in specific markets or states," Kim wrote.

On June 1, 2013, CHI assumed control of St. Luke's Health System based in Houston, which includes six acute care hospitals and multiple clinic facilities.

"Unlike CHI's other recent transactions, this represents entrance into a new market for CHI," Kim said. "Management's rationale was to expand into one of the fastest growing markets in the country."

St. Luke's also has several key affiliations including Baylor College of Medicine, Texas Heart Institute, and MD Anderson Cancer Center. In the fiscal year ended Dec. 31, 2012, St. Luke's generated total operating revenues of $1.2 billion, producing operating and operating EBITDA margins of 4.8% and 14.2%.

Other key acquisitions include Highline Medical Center and Harrison Medical Center, both located in Washington state, where CHI has a large presence with Franciscan Health System.

Key divestitures include the completed sales of St. Joseph Medical Center to University of Maryland Medical System and St. Mary's Healthcare Center in South Dakota to Avera Health, and the pending sale of Saint Claire's Health System in New Jersey to Prime Healthcare Services.

"Fitch expects that CHI's activity in mergers, acquisitions and divestitures will continue as the system executes its plan to build scale in its identified key markets in Washington, Colorado, Nebraska and Iowa, Kentucky, Ohio, and Texas," Kim said.

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