CHICAGO - Chicago-based Resurrection Health Care today launches its restructuring of about $340 million of auction-rate securities with the conversion of $225 million to triple-A insured, fixed-rate bonds through the Illinois Finance Authority.

The largest Catholic health care system in the Chicago area will convert its Series 1999A and B series with today's pricing. The transaction will be followed next week with a $100 million variable-rate refunding bond issue that, along with some cash on hand, will refund RHC's $116 million Series 1999C of auction-rate securities.

Merrill Lynch & Co. is the underwriter and Jones Day is bond counsel. Financial Security Assurance will provide coverage on the fixed-rate bonds. JPMorgan Chase Bank and Bank of America are providing letters of credit on the variable-rate tranche.

Hospital officials were not available yesterday to provide additional information on the increased interest costs incurred in recent months after investors fled the auction-rate market amid the credit crunch. Auctions began failing in February.

The restructuring will resolve one fiscal burden for the system that operates eight hospitals in the Chicago area, but the operating struggles that prompted two rating agencies to downgrade the credit remain.

Ahead of the transactions, Standard & Poor's knocked Resurrection down a notch out of the A category, moving it to BBB-plus from A-minus with a stable outlook. Fitch Ratings downgraded the credit one notch to A-minus - a level in line with the A3 assigned by Moody's Investors Service - but analysts left a negative outlook on the rating. Moody's has not yet released a current report.

"They continue to post negative operating margins and I didn't feel I could put a stable outlook on the credit until they show some stabilization in their operating profitability," said Fitch analyst Jim LeBuhn. The system has a total of about $644 million of debt outstanding and has seen a round of downgrades over the last two years due to its operating struggles.

From fiscal 2006 to fiscal 2007, RHC experienced a 1.9% decline to 103,041 in inpatient admissions and a 7.9% decline in outpatient volumes to 734,207. Through the nine months ended March 31, it has seen further erosion in those numbers with declines of 5.7% and 5.1%, respectively. Through the same period, Resurrection reported a $45.7 million operating loss for a negative 3.7% operating margin. The system had total operating revenues of $1.7 billion in fiscal 2007.

The operating loss came even as the system received a net benefit of $23 million from a state assessment program that taxes hospitals based on their volume levels to leverage additional federal Medicaid funds. The program expires this year but state lawmakers hope to renew it.

Charity care and bad debt costs, and the number of Medicaid payors are also on the rise - accounting for 9.3% and 17.8% of gross revenues, respectively - putting a further strain on the system's financial performance. Not-for-profit hospitals are also under pressure in Illinois to provide more charity care to justify their exemptions from property taxes and their ability to access the tax-exempt bond market through the IFA.

LeBuhn wrote in the Fitch report that "RHC's financial performance has been negatively impacted by the board and management's delay in addressing personnel costs to reflect a three-year decline in patient volumes."

The current chief executive officer is retiring by the end of the year, and Fitch wrote that it's "critical the incoming CEO effectively manage expenses and be allowed to implement cost-control initiatives."

Resurrection's credit strengths include solid liquidity levels with unrestricted cash and investments totaling $959 million, a level that provides 241 days cash on hand and 23 times coverage of debt service, and which compares favorably to other A-rated credits in Fitch's portfolio.

"While management has articulated an operating action plan and begun initiatives to improve performance, further rating or outlook pressure could occur if future operating losses continue on the current trend or the operating losses coupled with capital spending negatively impact the balance sheet and unrestricted liquidity," said Standard & Poor's analyst Suzie Desai. Fiscal 2008 is expected to be the fourth consecutive year of significant operating losses at RHC.

Despite some drop in volume levels, the system maintains a leading market share of 31% on the northwest side of Chicago compared to its chief competitor in Chicago, Advocate Health Care, the largest provider in the Chicago area, which holds 12.6% of the northwest Chicago market. In addition to eight hospitals, RHC manages 12 long-term care facilities.


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