Pressure rising on Centegra Health as Northwestern merger languishes

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CHICAGO – Illinois-based Centegra Health System & Affiliates is at risk of losing its investment grade rating if its acquisition by the fiscally healthier Northwestern Memorial HealthCare is further delayed or falls through.

Fitch Ratings issued the warning Wednesday by putting the system’s BBB-minus rating on Rating Watch Negative. Fitch rates about $325 million of Centegra bonds sold through the Illinois Finance Authority in 2012 and 2014.

The two announced the deal in 2016 and it was originally supposed to close that year, but it was then pushed off to 2017. It has languished as the systems attempted to resolve issues in dispute. The two are expected to enter a definitive agreement within the next month and the deal would close in September, according to Fitch.

“If the transaction is further delayed or terminated, Fitch expects significant rating pressure for Centegra with the consideration for a multi-notch downgrade,” Fitch said.

On its own, Centegra which operates three hospitals, is grappling with weak operating profitability that worsened in 2017 and a high debt burden. Debt payments are secured by a pledge of the unrestricted receivables of the obligated group and a mortgage interest in certain property of the OG. There is no debt service reserve fund.

Centegra's fiscal deterioration and downgrades have been primarily driven by sharp declines in profitability that followed the opening of the new Huntley hospital, repositioning of its campuses, shifts in payor mix, increased labor expense and higher spending due to competition.

If completed, the acquisition “should translate to a significant change for Centegra, providing the organization with the resources and enhanced profile needed to remain competitive in this consolidating market and reduce operating expenses through significant synergies with NMH,” Fitch said.

Fitch said it intends to evaluate expectations for Centegra's operating and financial profiles after the transaction has closed. If Centegra's debt is assumed by NMH, it would take on the credit quality of NMH which is not rated by Fitch. Northwestern carries double-A level ratings from other rating agencies.

Centegra operates hospitals in affluent areas but also faces tough competition from other big systems. Centegra’s main hospital is located far northwest of Chicago in McHenry County. It also operates two others in the region including a new Huntley hospital that has strained profitability and driven its debt up. 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.

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