DALLAS – Mishawaka, Indiana-headquartered health provider Franciscan Alliance plans to sell $340 million of bonds in a negotiated sale scheduled for next Monday.

The Indiana Finance Authority will be the conduit issuer. Roughly $175 million of bond proceeds will be used to fund capital expenditures, the rest will be used to refund all or part of the outstanding 2009A bonds.

The Michigan City, Indiana hospital of Franciscan Alliance, which is building a replacement due to open in 2018.
The Michigan City, Indiana hospital of Franciscan Alliance, which is building a replacement due to open in 2018.

Moody’s Investors Service revised its outlook on Francisan's Aa3 rating to negative from stable ahead of sale, citing concerns that increased operating leverage might impact the health system as it looks to complete multiple capital intensive consolidation projects.

Moody's said it expects margins to moderate from historical levels due to a variety of cost and revenue pressures.

“As a result, operating leverage will be moderately high for its current rating level,” Moody’s stated. “Further, the system will face some challenges as it consolidates sites and develops centers of excellence to address over-bedding and improve efficiencies in certain markets.”

Capital spending is projected to average $327 million per year between fiscal years 2018 and 2020. Projects include a replacement hospital on the Michigan City campus, consolidation of the Chicago Heights and Olympia Fields hospitals on the Olympia Fields campus, a new cancer center on the Munster campus and a new patient tower on the Lafayette East campus. The hospital group is also in talks to merge with Methodist Hospitals, Northwest Indiana's third-largest hospital system.

Fitch Ratings affirmed its AA rating on the bonds. Outlook is stable.

Bank of America Merrill Lynch is senior manager. Ice Miller LLP is bond counsel.

The system operates 14 hospitals in four distinct regional markets along the I-65 corridor between Chicago and Indianapolis. Additional operations include 14 urgent care centers, an employed physician group with 635 employed physicians and 160 clinic sites, home care services and an accountable-care organization with approximately 205,000 lives under management.

The credit group accounted for approximately 97% of both consolidated total revenue and consolidated total assets in fiscal 2016. Total consolidated operating revenues equaled $2.93 billion in fiscal 2016.

Franciscan Alliance will have approximately $1.18 billion of total debt outstanding after the series 2017 bonds are sold.

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