Northwestern affiliation bolsters Centegra ratings

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CHICAGO — Centegra Health System’s recent acquisition by Northwestern Memorial Healthcare has eased the struggling system’s rating pressures.

The two systems are based in Illinois.

S&P Global Ratings late last week replaced Centegra’s junk rating of BB-plus with Northwestern’s AA-plus credit and stable outlook. Fitch Ratings withdrew its BBB-minus rating as it does not rate Northwestern. Fitch had the rating on rating watch negative.

Centegra has about $300 million of debt issued in 2012 and 2014 through the Illinois Finance Authority.

"The upgrade reflects NMHC's assumption of Centegra's debt … under the NMHC master trust indenture on parity with outstanding debt," said S&P analyst Anne Cosgrove.

NMHC became the sole corporate member of Centegra under an affiliation agreement finalized early last month after winning approval from regulators and both systems’ boards. “Both organizations took steps to align their debt structures, and all outstanding notes under the Centegra master indenture have been substituted by notes issued under the NMHC master indenture,” Cosgrove said.

Centegra, which operates three hospitals far northwest of Chicago in Huntley, McHenry, and Woodstock, was struggling with weak operating profitability and a high debt load and faced further credit deterioration without the merger.

Centegra operates hospitals in affluent areas but also faces tough competition from other big systems. Overall, Centegra's market share grew in 2017 with the opening of a Huntley facility to a 45.7% share from 41.2% in 2016.

But the opening of the new hospital had hurt its balance sheet along with a repositioning of its campuses, shifts in payor mix, increased labor expense, and higher spending due to competition.

Debt payments were secured by a pledge of the unrestricted receivables of the obligated group and a mortgage interest in certain property of the obligated group. There was no debt service reserve fund.

The two systems announced their union in 2016 and it was originally supposed to close that year, but it was then pushed off to 2017. It continued to languish as the systems attempted to resolve various operating issues in dispute.

The top-ranked Northwestern is anchored by its downtown Chicago hospital but has expanded its footprint outside Chicago through acquisitions and affiliations.

It is the parent of Northwestern Medicine, which includes the Northwestern University Feinberg School of Medicine. In addition to the downtown flagship and the Centegra facilities, it operates five other hospitals to the west, south, north, and northwest of Chicago as well as a rehabilitation hospital.

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