PHOENIX – Two large bond offerings from Providence St. Joseph Health, the result of a merger between two major West Coast healthcare providers, reflect the continuing trend of consolidation in the not-for-profit healthcare sector.
Washington-based Providence Health & Services and California-based St. Joseph Health System merged earlier this year, becoming a 100,000-employee system spanning seven states.
Bank of America Merrill Lynch priced the California Health Facilities Financing Authority's $446.61 million of Series 2016A revenue bonds for the new system Aug. 23. The first deal priced to yield from 1.06% with a 5% coupon in 2022 to 2.64% with a 4% coupon in 2036; a 2041 maturity was priced as 3s to yield 3.06% and a split 2047 maturity was priced as 3s to yield 3.09% and as 4s to yield 2.76%.
On Thursday, the same underwriter priced another $288.52 million of Series 2016B CHFFA revenue bonds for Providence St. Joseph Health, with yields from 1.25% at par for $96.17 million of Series 2016B-1 bonds with a 2020 mandatory tender, to 2%, at par, for $96.34 million of Series 2016B-3 bonds with a bullet 2036 maturity and a 2025 mandatory tender.
The bonds in large part are being issued to retire outstanding St. Joseph debt to consolidate the new entity's obligations under its new master indenture.
An executive summary of the situation released by CHFFA showed a planned issuance of a total of $1.8 billion in refunding bonds.
Fitch Ratings downgraded the PSJH bonds last month, moving them to AA-minus from AA. The system is rated AA-minus by S&P Global ratings and Aa3 by Moody's Investors Service.
In a recorded investor roadshow, officials say PSJH's financial performance has improved, with operating revenues climbing every year. Most of its patient revenue comes from hospitals in western Washington, where the group operates eight of its 50 hospitals.
The next biggest market for the group is Southern California. The system is organized into eight "operating markets," each of which is overseen by a chief executive who reports to a system-wide chief of operations.
"Both organizations, before we even came together, had really had a strong record of growing the top line of our organization," PSJH executive vice president Todd Hofheins said in the presentation.
Hofheins credited acquisitions of smaller providers by both entities when they were separate as a key reason for the success, noting that acquisitions were a key strategy of both providers.
That mirrors the trend in the larger nonprofit healthcare sector, which has changed dramatically in the wake of the sweeping Affordable Care Act that became federal law in 2010.
The law significantly changed the way health insurers do business, and altered the landscape of the industry. The law provided health insurance access to millions of previously uninsured Americans, but also imposed significant new compliance requirements on the industry. Many Republicans are publicly dedicated to repealing the ACA, though that is likely impossible without a Republican president. President Obama, who made the law a signature issue upon taking office in 2009, has vetoed an ACA repeal bill.
Emily Wadhwani, a director in Fitch's U.S. Public Finance group, penned a report released Wednesday on the nonprofit healthcare sector, saying that Fitch views it as stable despite its negative outlook due to pressures remaining from the ACA.
"Fitch's rated nonprofit hospital sector has a stable rating outlook, with issuers demonstrating stability across all rating categories," Wadhwani wrote. "However, we maintain a negative sector outlook reflecting our expectation that many of the expected pressures from healthcare reform have not been diminished, only deferred."
She said that year 2015 was the second consecutive year of improvement in operations and profitability as a result of a continued focus on improving operating cost efficiencies, expanded coverage under the ACA, and revenue cycle improvement.
In a separate interview with The Bond Buyer, Wadhwani said mergers like the one that created PSJH have been a trend and she expects will continue to be a trend.
"Increasingly, hospital providers are looking for some kind of meaningful scale," she said. "We fully expect to continue seeing consolidation in the market, and it's a direct and indirect result of the ACA."
She said that Fitch views positively entities that are able to spread their revenue bases across a larger area, even though mergers can create upheaval that can be negative. Overall she said that healthcare provider consolidation could put hospitals in a stronger position at the negotiating table with insurers, with whom they must haggle to get paid.
"They don't compete, but they certainly have to contract and negotiate," Wadhwani said. "It's likely pretty positive for the industry," she said of the consolidation trend.
"Liquidity metrics were virtually unchanged from the prior year despite relatively volatile investment markets reflecting solid cash flow generation, moderate capital spending, and a diversified investment approach," Wadhwani wrote in her report on the sector. "Overall median leverage ratios were unchanged to slightly improved, continuing a longer term trend towards a moderating leverage position. The further moderation in median debt and leverage ratios reflects the constrained capital spending, a favorable interest rate environment, moderate revenue growth, and improved profitability. Rating actions during 2015 displayed a distinctly positive trend, with 146 affirmations, nine downgrades, and 33 upgrades."
Rating actions in 2016 are "decidedly more balanced," she wrote. Through July 31, Fitch has had 82 rating affirmations, 12 rating downgrades and 12 rating upgrades.
PSJH has made mental health a major focus going forward, announcing in its July merger release that aims "a catalyst for improving mental health care in the United States." The health system has established the Foundation for Mental Health and Wellness to drive that goal, with an initial investment of $100 million. The fund will support research and startup operations for mental health awareness, diagnosis and treatment, PSJH announced. Fund distributions will be made through a formalized grant process. Members of an expert advisory panel convened for the purpose will provide strategic guidance on the distribution of funds.