Newly merged Michigan health systems ready deal that combines debt

The newly minted BHSH System created by the merger of Beaumont Health and Spectrum Health heads into the market this week with its first deal.

The Michigan-based system will price on Thursday $1.187 billion of tax-exempt refunding bonds through the Michigan Finance Authority and another $300 million of taxables on its own. Morgan Stanley and JPMorgan are senior managers and Ponder & Co. is advising the system. Miller Canfield Plc is bond counsel.

The tax-exempt deal will refinance all of the legacy Beaumont debt with the exception of its 2017 bonds that are being refinanced with the taxable series. The taxables also will raise $225 million of new money for capital spending.

Spectrum Health

The not-for-profit systems announced their intention to merge by signing a letter of intent in June 2021. One month later, the Biden administration launched its efforts to target anti-competitive practices across a swath of sectors, including healthcare, with federal agencies charged by executive order to implement 72 initiatives.

The systems had aimed to close the deal last fall but later pushed back the timing of the merger saying they were supplying federal authorities with additional requested information on the proposed merger and that the Federal Trade Commission was dealing with a backlog of filings to review.

Federal authorities did not attempt to block the merger and the combined organization launched Feb. 1 as the BHSH System. The new deal is being sold under the BHSH System’s obligated group using Spectrum’s outstanding master trust indenture. Beaumont will join the group and its MTI is being retired.

The new system is rated AA by S&P Global Ratings – the same rating previously assigned to Spectrum’s debt and two notches higher than outstanding Beaumont bonds. S&P also raised Beaumont’s legacy debt to AA from A-plus.

"The 'AA' rating reflects our view of the new combined entity, BHSH, which creates an expanded delivery system from the western side of Michigan to the populous southeastern Michigan area with opportunities for additional growth at Priority Health, BHSH's statewide health plan covering 1.2 million residents," said S&P analyst Suzie Desai.

BHSH's overall financial profile remains sound with low pro forma debt, good cash flow despite the pressures from the COVID-19 pandemic, and adequate cash on hand that is affected by BHSH's large health plan, Priority Health, and its large expense base.

Beaumont Health does have a modest dilutive impact but S&P believes legacy Spectrum has some room at the rating level to absorb Beaumont’s weaker financial metrics.

The new system received an Aa3 and stable outlook from Moody’s Investor Service. That’s the same level Spectrum carried and represents a one notch increase from the A1 rating Beaumont brought to the table.

“Assignment of the Aa3 to BHSH System reflects a number of fundamental strengths at the new organization including its significant size and scale as the largest health system in Michigan with operations in several parts of the state, ownership of and integration with a large and profitable health plan, and good pro-forma financial metrics including stable margins, low leverage, and good liquidity,” Moody’s said.

Though full integration will likely take several years, both legacy organizations have a long track record of financial stability and while capital spending is expected to grow no material change in the leverage profile is expected, Moody’s said.

“Governance is a key driver for this rating action. Key individuals appointed to lead BHSH system have a long track record generating stable and good financial results at the legacy organizations,” Moody’s said.

Priority Health is not a member of the obligated group nor is it a designated affiliate although it accounts for about 40% to 45% of total consolidated system revenues.

Tina Freese Decker, who led Grand Rapids-based Spectrum, is president and chief executive officer of the new system. Southfield-based Beaumont’s chief, John Fox, is departing. Fox came under fire from employees as the system considered a merger with Advocate Aurora Health in 2020. Employees were concerned the merger would strip away too much local control and hurt patient care.

The new system operates 22 hospitals and 300 outpatient facilities, employing 64,000. Beaumont brings patient revenues of $4.6 billion to the merger and was the largest Michigan system based on net patient revenues and inpatient admissions.

Spectrum brings $8.3 billion of revenues to the table, some coming from Priority Health, a health plan with more than 1.2 million members. Beaumont brought $1.5 billion of debt into the merger and Spectrum had $1.1 billion of debt.

The deal is the latest as healthcare consolidation continues. The COVID-19 pandemic influenced merger decisions, slowing some while speeding up others, and forced some hospitals to rethink strategies. Larger systems continue to seek partners to leverage their scale and broaden their regional expertise while smaller hospitals are searching for fiscally healthier partners.

Activity for the first quarter, however, slowed compared to the same period last year.