Illinois system in acquisition mode gets downgrade

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Illinois-based OSF Healthcare System took a one notch rating cut from Moody’s Investors Service as its operations adjust to accommodate recent and pending acquisitions.

Moody’s dropped the rating on $1.1 billion of debt to A3 from A2 and assigned a stable outlook at the lower rating. The outlook had previously been negative.

The downgrade “reflects Moody's belief that OSF will not likely return to historically stronger margins and will sustain relatively high leverage amid heightened exposure to strong competition especially as it enters new markets,” Moody’s wrote in the Wednesday report.

OSF's credit profile benefits from its large multi-site presence in northern, central, and southern Illinois, and its leading market positions in several markets including its key Peoria market where its flagship OSF Saint Francis Medical Center is based. OSF has maintained a solid level of days cash.

On the downside, it must manage a relatively high direct leverage, has sizable indirect debt, faces strong competition within all its markets and relies heavily on income from its flagship facility.

“Operating metrics will likely be moderate and remain below peak levels achieved in the 2015 timeframe,” Moody’s said.

OSF is seeking to reverse material operating losses at two recently acquired hospitals in a market with a leading competitor. OSF issued debt last year to take out interim financing for its acquisition of Presence Covenant Medical Center in Urbana and Presence United Samaritans Medical Center in Danville. They were owned by Presence Health which then was acquired by Ascension.

The hospital acquisitions “will add some scale and potential upside opportunity, but will also hinder deleveraging and expose OSF to a market dominated by the Carle Foundation,” Moody’s said in a report last year.

On July 17, OSF HealthCare and Little Company of Mary Hospital & Health Care Centers, which is based in the Chicago suburb of Evergreen Park, announced they were in exclusive negotiations to merge, adding to the system’s 13-hospital network.

Acquiring Little Company will expand OSF’s presence to the Chicago area. The acquisition “would benefit liquidity but would come with operating challenges and margin dilution in a new, highly consolidated and competitive market,” Moody’s wrote in the Wednesday report.

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Ratings Not-for-profit healthcare Illinois Finance Authority Illinois