Illinois-based OSF Healthcare heads into the market with first coronavirus-era deal

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Illinois-based OSF Healthcare System heads into the market Thursday with a $430 million deal that will help finance a new cancer treatment center and absorb debt from an acquired hospital.

The system is selling three series through the Illinois Finance Authority — a $107 million tax-exempt tranche, a $149 million tax-exempt tranche, and a $172 million taxable piece.

JPMorgan and Morgan Stanley are the underwriters. Kaufman Hall & Associates LLC is advising the system and Chapman and Cutler LLP is bond counsel.

Even as the system faces losses driven by the COVID-19 pandemic, it held on to a positive outlook from Fitch Ratings.

OSF's St. Francis hospital

Fitch affirmed the system’s A rating and positive outlook. Moody’s Investors Service affirmed the A3 rating and stable outlook, and S&P Global Ratings affirmed system’s A rating and stable outlook. The system has about $1.6 billion of debt.

Fitch said the rating is supported by the system’s “broad reach over multiple markets in Illinois, with a distinct market share lead in its core service area around Peoria” and the positive outlook is based on the expectation that OSF will improve “despite being pressured in the near term from the coronavirus pandemic and the integration of LCOM.”

Due to the pandemic and ensuing recession, Fitch cautioned the outlook won’t be resolved in the near term.

"The stable outlook reflects our expectation that OSF will maintain its improved liquidity position and will improve operating performance in fiscal 2021 due to its focus on cost savings and OSF's ability to manage volumes at close to pre-pandemic levels," said S&P analyst Anne Cosgrove.

S&P said the system’s governance and environmental risks are in line with its view of the sector as a whole but it views OSF’s “management's focus on innovation, as well as strategic growth, amid an evolving health care market” positively.

A portion of the deal will absorb the outstanding debt of Little Company of Mary Hospital, located in the southwest Chicago suburb of Evergreen Park. LCOM joined OSF earlier this year and is now a member of the obligated group.

S&P cautioned the system about future acquisitions. “We would view additional merger and acquisition activity above and beyond LCM negatively if it resulted in an increase in leverage or further dilution of margins,” S&P said.

OSF operates 14 acute care hospitals and a large multi-specialty physician group. All but one facility in the Upper Peninsula of Michigan are located in Illinois. The system's largest hospital — OSF Saint Francis Medical Center — is in Peoria. The system expects $3 billion of revenue for fiscal 2020, which ends Sept. 30.

Like most hospitals, the system grappled with rising personnel and equipment costs and lost revenue when Illinois hospitals were ordered by the state to halt elective procedures and surgeries between mid-March and early May.

Through June, patient revenue was down 13.2% or $312 million. The loss was partially offset by federal relief, leaving the system with a $54.9 million budget gap. Through June, the system had treated 957 COVID-19 inpatients. COVID-19 is referenced 94 times in the offering statements.

The system launched an emergency operations center, leveraging OSF's analytics capabilities to monitor and manage PPE supplies and other supply chains; paused $55 million of non-essential capital spending; furloughed non-critical staff; reduced executive staff pay; and lowered employer 401(k) contributions that combined cut about $80 million in expenses.

The system received CARES Act hospital grants of $123 million and took advantage of the Medicare advanced payment program, receiving an advance on $311 million as of June 30. It also established lines of credits to manage liquidity.

The system said volumes are on the rebound. OSF management expects to meet financial covenants despite the weak margins through nine months of fiscal 2020 that ends Sept. 30.

Moody’s said it A3 “acknowledges OSF's favorable financial performance leading up to the pandemic, in part enabled by the system's transformation to an operating company from a holding company and a centralized management model.”

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