Northwestern Memorial HealthCare is prepping a tax-exempt and taxable refunding mix of $700 million to $800 million of debt that will bring its
The Illinois Finance Authority signed off on up to $1.15 billion of borrowing for the Chicago-based health system at its
“NMHC’s comprehensive transaction is expected to be one of the largest financings ever facilitated by the authority,” Christopher Meister, the conduit’s executive director said in board documents. “Bond proceeds will be used to refund all or a portion of multiple series of outstanding authority bonds.”
The bonds — including a public offering of roughly $500 million to $575 million of taxables and $200 million to $300 million of tax-exempts — would refund fixed-and floating-rate debt issued by Northwestern and outstanding debt under Palos Health and Centegra Health and Kish Health’s credits, all now part of the NMHC system.
“The upcoming financing will simplify NMHC's debt structure by reducing the number of series from 26 to 14, reduce interest rates, and provide longer-term fixed financing,” Moody’s Investors Service said. “Post-financing, debt structure risks will be manageable given good bank diversification and strong liquidity.”
NMHC will have about 20% bank-related debt, including bonds supported by bank standby bond purchase agreements and private bank placements. Following the financing, the system will have $126 million in weekly variable rate demand obligations and $78 million in outstanding commercial paper of an authorized level of $200 million.
The underwriting team includes RBC Capital Markets, JPMorgan, Barclays, Loop Capital Markets LLC, and Cabrera Capital Markets LLC. The sale is not yet on the issuance calendar.
Northwestern’s double-A level ratings survived the COVID-19 pandemic’s bruises and the system managed to complete the acquisition of Palos Health — announced last summer — including its 425-bed Palos Community Hospital in suburban Chicago as planned.
Palos will join the system’s obligated group under an amended and restated master indenture that will take effect with the financing.
The acquisition will slightly dilute the system’s finances initially, but S&P Global Ratings believes Palos can be absorbed based on the current healthy credit profile of NMHC and management's track record of integrating new entities and improving operations within a short time frame.
Palos had about $400 million of total revenue in its last fiscal year and $340 million of debt. Palos carried a AA-minus from Fitch Ratings that was affirmed last year.
Northwestern expects about $7.2 billion of revenues for fiscal 2021, which ends Aug. 30, up from $6.3 billion in 2020, and has $2 billion of debt.
The union gives Palos, a community-based independent system which serves the south suburbs, access to a prestigious system that often captures top health care rankings. It previously had planned to merge with another system, but that fell through.
Northwestern benefits by broadening its reach into the south suburbs. Northwestern operates 10 acute care, rehabilitation, and behavioral hospitals in Chicago, its northern, northwest and western suburbs. Its downtown Chicago flagship Northwestern Memorial Hospital serves as the primary teaching center for Northwestern University’s Feinberg School of Medicine.
Northwestern’s last acquisition came in 2018, when it absorbed the three-hospital system known as Centegra Health System. Few independent hospitals remain in the region as they seek mergers with fiscally stronger systems or strike partnerships to manage costs and take advantage of negotiating benefits that come with larger-scale operations.
Ahead of the sale, Moody’s affirmed the NMHC’s Aa2 rating and stable outlook. S&P hasn’t yet published a report on the financing but affirmed the AA-plus rating and stable outlook in May.
Moody’s views favorably “NMHC's consolidated operating model and financial discipline” and believes they “will allow it to effectively execute strategies, while maintaining a strong financial position. As demonstrated during a period of rapid growth and amid the pandemic, this will support its ability to integrate and improve performance at Palos Health following its merger in January.”
NMHC benefits from a prominent market position in the broader Chicago region, favorable locations, and the Feinberg affiliation.
Managing workforce needs poses operating challenges due to clinical staff shortages that span the sector nationally amid pandemic burnout. “In addition, competition from large healthcare systems and academic medical centers will continue to rise as the market further consolidates in a region with projected population declines,” Moody’s said.
“The ratings reflect our view of NMHC's sustained solid operational performance and balance-sheet metrics during a period of significant growth,” S&P said. "As a system, NMHC has successfully integrated new members into the organization, and it has reaped the benefits of operating more as a system than a federation of hospitals.”
NMHC faces tough competition in the region, but it benefits from a strong brand and enjoys a prominent position with a management team “focused on strategic growth and pioneer-like efforts, including telehealth and artificial intelligence,” S&P said.
Northwestern suffered pandemic wounds, like most in the hospital sector, due to more costly personnel and equipment expenses and the loss of revenue that came with mandates to halt elective procedures and surgeries in order to treat COVID-19 patients during the spring of 2020. Federal aid helped soften some of the wounds and hospitals moved to recovery mode in the latter half of 2020 after services resumed.
“NMHC's operations were significantly affected by the pandemic in fiscal 2020,” S&P said. “Volumes have recovered through the interim period ended Feb. 28, 2021, although they are still slightly below pre-COVID-19 levels.”
NMHC received $289 million and $12 million for fiscal 2020 and the interim period ended Feb. 28, 2021, respectively, from the CARES Act signed in March 2020. The system also received a $412 million Medicare accelerated payment, which must be repaid.
The system absorbed a material impact from the pandemic and still generated a 10% margin. The system's nine-month year-to-date fiscal 2021 margin of 13% including $53 million of federal grants, will likely moderate somewhat in the fourth quarter as the system makes previously deferred investments. The system's ability to return to 11%-12% pre-pandemic margins will be driven by good volume recovery and cost management, Moody’s said.
The authority board also authorized Lawndale Educational and Regional Network Charter School’s $30 million new money and refunding issue.
The board also authorized the continuing care community Plymouth Place, Inc.’s $62 million refunding issue. The facility is located in the Chicago suburb of LaGrange Park. The “Cinderella” bonds will be direct purchased by Barclays as taxable bonds but may be converted to tax-exempt status 90 days prior to the first optional redemption date of the facility’s 2015 bonds being refunded.
The bonds will not carry a rating due to the bank direct purchase structure, but the borrower is rated BB-plus with a stable outlook by Fitch Ratings.
The board also signed off on two Property Assessed Clean Energy, or PACE, deals each for $100 million for Twain Financial Partners Holding LLC and PACE Equity LLC. Proceeds will be loaned to record owners of privately owned commercial, industrial, non-residential agricultural, or multi-family of five or more units) real property to finance qualified energy projects statewide.
