DALLAS -- Mercy Health Ohio is among the crowded field that hits the market this week with plans to sell about $700 million of new money and refunding bonds Tuesday.
Allen County will be conduit issuer for the roughly $494 million of fixed-rate bonds and $91 million of variable-rate bonds, both of which are tax-exempt. Mercy also is offering $139 million of taxable bonds.
Around $140 million of the bond proceeds will finance capital projects and $60 million will reimburse the system for previous projects. The remaining proceeds will refund outstanding debt. A portion of the proceeds will return to the balance sheet and increase unrestricted reserves.
JPMorgan and Wells Fargo are co-senior managers.
The bond issue marks the use of a new amended trust indenture. The bonds will be secured by the corporate parent only; the individual hospitals are not legally liable for the debt. Other proposed changes include substituting the gross revenue pledge with a gross receivables pledge. The changes won’t become effective until the system receives more than 50% of bondholder consent.
Moody’s Investors Service, which rates the bonds A2, said the MTI “is a weaker security than a joint and several obligated group structure whereby all operating entities are liable for the debt.” Moody’s outlook is stable.
S&P Global Ratings affirmed the A-plus ratings on the bonds with a stable outlook. Fitch Ratings affirmed its AA-minus rating on the bonds. The outlook is negative.
“Because of the positive trends in both finances and operations, we believe Mercy Health has capacity for this additional debt at the current rating level especially as consolidated debt service is expected to remain flat,” S&P stated.
The Cincinnati-headquartered healthcare system has a statewide presence in Ohio and Kentucky. The system has experienced substantial growth over the past seven years with total operating revenue increasing 43% since fiscal 2009 to $4.5 billion in fiscal 2016, including a 5.1% year over year increase since fiscal 2015.
With the series 2017 bond issuance, Mercy Health will have approximately $2.1 billion of debt outstanding. The system's debt outstanding is comprised 67% underlying fixed-rate bonds and 33% underlying variable-rate bonds.
All three rating agencies took action against the system in 2016 due to significant losses generated by HealthSpan Partners' insurance and physician care delivery operations, which were purchased by Mercy Health in 2013 and operated previously as Kaiser Foundation Health Plan of Ohio and Ohio Permanente Medical Group. Moody’s and S&P downgraded the rating and Fitch downgraded its outlook on the credit.
“The HealthSpan dissolution is substantially completed and was achieved below estimated costs,” said Fitch. “The dissolution is expected to have a minimal impact on profitability going forward.”
Mercy Health continues to face an additional cash squeeze from collection issues related to the transition of its information technology platforms. The system will complete migration of its largest regions to new revenue cycle IT platforms by mid-2018, which, according to Moody’s, “can cause slowdowns in collections and elevate operating costs.”