CommonSpirit to combine pre-merger debt in a $5.5 billion deal

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A newly merged health system created by two western nonprofit hospital chains will sell a massive bond offering this summer to bring its debt into a single credit group.

CommonSpirit Health, which formed in February following a merger between San Francisco-based Dignity Health and Catholic Health Initiatives in suburban Denver, is planning to refinance billions of debt next month. The two health systems competed their merger on Feb. 1 more than two years after first announcing plans to combine forces in October 2016.


“Now that our two founding organizations have come together, creating a single credit structure is a critical step toward creating a stronger financial and operational foundation for CommonSpirit Health,” the Chicago-based company said in a statement Tuesday. “As part of this process we plan to refinance approximately $5.5 billion of our bonds. This will help us realize savings and reimburse the organization for prior capital expenditures.”

Prior to the merger taking effect, CHI had about $8.5 billion of debt outstanding and Dignity had around $5.2 billion, the companies said during a March investor call. Lisa Zuckerman, CommonSpirit’s senior vice president for treasury and strategic investments, noted on a June 7 investor relations call that both firms utilized bridge financing in the last two years to manage debt because they did not want to issue bonds while the merger was pending.

“Unlike an incremental new credit, CommonSpirit’s debt will be replacing the debt of the prior organizations that will no longer exist as active issuers,” said Lisa Washburn, managing director at Municipal Market Analytics.

No official statement or ratings on the planned bond refinancing was released as of press time Wednesday. CommonSpirit wrote in an April 24 Electronic Municipal Market Access notice that it anticipates using Citi, JPMorgan and Morgan Stanley as senior managers for the deal.

CommonSpirit said in its statement Tuesday that bond offering documents should be distributed later this month before holding meetings with investors. The bonds are then slated to price in early August.

“We believe that a market-appropriate credit structure is important as far as honoring the commitments our organizations have made to existing bondholders and maintaining capital access for CommonSpirit Health,” Zuckerman said on the investor call. “We think longer-term it is a big positive for the organization in terms of overall cost, cash flow and risk mitigation.”

CHI was last rated Baa1 by Moody’s Investors Service and BBB-plus by S&P Global Ratings and Fitch Ratings. All three rating agencies assigned stable outlooks.

Dignity’s debt is rated slightly higher at A3 by Moody’s, A by S&P and A-minus by Fitch. Fitch and Moody’s have a stable outlook on the bonds while S&P assigns a negative outlook to Dignity’s debt.

“With this single transaction what we are trying to do is put all of the debt that is outstanding between Dignity Health and historical CHI under a single master trust indenture all with the same security package so that all bondholders and their obligations will be from parity debt,” Jean Ham, vice president and assistant treasurer at Dignity Health, said during the June 7 investor call.

S&P announced in February that Dignity and CHI’s ratings would be not be changed until there was a “comprehensive” meeting with the newly merged organization. The two legacy health systems will eventually carry the same rating even if the obligated groups remain separate for the near- or long-term, according to the S&P statement.

S&P credit analyst Kenneth Gacka said in early July that it is common in the mergers & acquisitions space to tackle the combined debt portfolio soon after the merger occurs, which often involves refinancing bonds. Gacka said he expects the CommonSpirit bond deal to include a mixture of tax-exempt, advanced refundings, current refundings and taxable debt.

“It is often a priority to get everything on the same footing from a consistency standpoint,” Gacka said. “More times than not it is a high priority.”

Gacka noted that mergers in the healthcare sector are a “heavy lift” because of various steps that have to be undertaken to harmonize documents. He said the rating review will examine how the combined health system will be comprised both fiscally and leadership wise.

“We will look at the legacy organizations to see what the combined organization will look like,” Gacka said. “We will spend a lot of time looking at what the management and governance structure will look like.”

CHI has a diverse debt structure with around 54% traditional fixed rate and the remainder consisting of long-term put bonds, taxable commercial paper, direct placements, and floating rate notes, according to a May 2018 Moody’s report. Moody’s analyst Brad Spielman noted that due in part to the merger with Dignity, CHI was planning to keep most of its debt as short-term maturities.

Spielman noted in a June 2018 report that Dignity’s outstanding debt included $1.1 billion issued as variable-rate bonds or bank debt and $834 million drawn on line of credit. Many of the outstanding bonds are backed by a pledge of gross revenues from Dignity Health’s Obligated Group.

Dignity Health, which was founded in 1986 as Catholic Healthcare West, netted nearly $13 billion of total revenues in the 2017 fiscal year, according to Moody’s. The system operates acute care facilities in California, Nevada, and Arizona. It was founded as an official ministry of the Roman Catholic Church before changing its corporate governance structure 2012 when the name Dignity Health was born.

CHI was formed in 1996 following a merger of four national Catholic health care systems and has a presence in 17 states. The system generated $15.5 billion in operating revenue in the 2017 fiscal year with its largest operations based in the Pacific Northwest, Colorado, Texas and Nebraska, according to Moody’s. In 2018 it was the fourth largest not-for-profit hospital system rated by Moody’s.

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