DALLAS -- Michigan-based Trinity Health Credit Group will take some unpleasant rating news into its pricing of $340 million of new-money and refunding bonds.

Fitch Ratings downgraded its long-term rating one notch to AA-minus from AA and revised the outlook to stable from negative at the lower rating. The rating agency affirmed Trinity's short-term F1-plus rating.

"The downgrade is driven by Trinity's thinner adjusted operating margins in fiscal 2016 with similar results in Q1 fiscal 2017," Fitch said. "Management has developed a comprehensive improvement plan that is expected to drive incremental operating margin improvement in the coming years."

Moody's shifted its outlook to negative from stable on its Aa3 long-term rating and top short-term rating on the expectation that cash flows will remain suppressed over the next several years as the group works restore is operating performance.

S&P Global Ratings affirmed Trinity's AA-minus rating and stable outlook.

"We've made great strides over the last year and like many on our industry we face challenges related particularly to supply costs and labor costs," said Mary Bernest, investor relations manager at Trinity Health. "We are working diligently and effectively to address those and we are confident that we can return to our historical performance over the long-term."

The rating actions affects $5.2 billion of bonds, $1.1 billion of variable rate-debt, and the system's $600 million of commercial paper program supported by self-liquidity.

They come as the group looks to issue $340 million of bonds that will be used to both reimburse Trinity Health for prior capital expenditures and to refund $60 million of debt.

Melio & Company is the system's financial advisor.

Goldman Sachs is the lead bookrunner on the deal. Bank of America Merrill Lynch is the co-senior manager.

Trinity plans to do roadshows in Boston and New York the week of Jan. 2 and the bonds are slated to price via negotiation on Tuesday, Jan. 10.

The deal is broken into different series being issued through the Michigan Finance Authority, the Maryland Health and Higher Educational Facilities Authority, the Idaho Health Facilities Authority, and Franklin County, Ohio; conduit issuers in states with Trinity facilities.

The refunding component of the deal is $60 million, which is part of the $160 million Michigan Finance Authority issuance. The refunding component is expected to generate about $6 million in savings for the group.

The rest of the issue is new money that will be used to reimburse the group for approximately $235 million of prior capital spending and pay down approximately $65 million in commercial paper, as well as pay the costs of issuance.

Trinity strengths include its national footprint with 93 hospitals in 22 states, 59 continuing care facilities, and 47 home care and hospice programs in 116 counties.

Financial performance was challenging in fiscal 2016 with an operating cash flow margin of 7.0% compared to 9.3% the prior year. The group's operational liquidity fell to approximately 187 days' cash on hand from 216 days in the prior year.

The system has cash and investments totaling about $7.8 billion.

"Operating income and cash flow weakened in all of Trinity's major ministries and new ministries in Syracuse, N.Y. and New England underperformed relative to many of Trinity's other more established markets," said Moody's.

The group has developed a comprehensive improvement plan that is expected to drive incremental operating margin improvement in the coming years. Trinity is budgeting at 2.2% operating margin and 8.4% operating cash flow margin in 2017.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.