CHICAGO – Seeking to put a rougher-than-expected 2016 behind it, St. Louis-based SSM Health Care Corp. heads into the market with a $500 million taxable issue to pay down some existing debt and help bolster liquidity and reserve levels.

The taxable issue will broaden SSM’s investor base by adding long-term, fixed-rated taxable securities to its current, nearly $2.2 billion debt portfolio. The deal will add a net $156 million of debt to the balance sheet after proceeds to pay down $200 million of taxable commercial paper and other debts.

SSM's DePaul Hospital in Bridgeton, Missouri
SSM Health Care Corp. , which operates 20 hospitals in four states, is coming to market.
SSM's DePaul Hospital in Bridgeton, Missouri

Goldman Sachs and Wells Fargo Securities are underwriting the bonds slated to price as soon as Monday. The bonds carry a final balloon maturity in 30 years.
Ahead of the sale, Fitch Ratings revised its outlook to negative from stable, while assigning the same AA-minus rating it applies to the system’s existing rated debt. S&P Global Ratings affirmed its A-plus rating and negative outlook.

“The negative outlook reflects SSM's compressed operating profitability in the second half of fiscal 2016,” Fitch wrote. “Due to the compression in profitability, management is in the process of implementing over $200 million of operating improvement initiatives” and “operating profitability is expected to improve in fiscal 2017.”

The rating “reflects SSM Health's good unrestricted reserves, including sound and stable operational liquidity as well as operating margins that improved in both fiscal 2014 and fiscal 2015, but have come under pressure during fiscal 2016,” S&P wrote. Some concerns did ease with the termination of SSM Health’s plan to form a union with Oklahoma University Medicine that would have added a material level of debt to SSM’s balance sheet.

The system’s chief financial officer, Kris Zimmer, acknowledged the system’s operating struggles in 2016 that exceeded the administration’s expectations, but SSM believes its “corrective action plans” will help improve its balance sheet. The transaction is part of that effort.

“It’s an important transaction to us,” Zimmer said in a recorded investor presentation. “We see it largely recapitalizing the balance sheet” but it also provides the system with fiscal flexibility and allows the system to take advantage of “low cost fixed rate debt beyond our current levels.”

The system which operates facilities in Illinois, Missouri, Oklahoma, and Wisconsin is coming off a period of heightened infrastructure investment and acquisitions that have brought the number of its acute care hospitals to 20. Its last acquisition occurred in 2015 with the addition of St. Louis University Hospital. The latest was considered a positive rating factor as it improves the system’s competitive edge in Missouri.

The growth and ongoing capital spending drove a decline in pro forma liquidity metrics. Fitch said cash on hand in 2016 was 159.3 days while its median for the AA category was 277.4 days.

The expansion doubled the system’s revenue base between 2011 and 2016. It generated $6.1 billion of revenue in fiscal 2016. SSM’s 2010 new strategic goals laid out in 2010 aim to raise revenues to the $7 billion mark by 2020, Zimmer said.

The system’s revenues have also grown more diverse in recent years so it’s less dependent on inpatient and outpatient care. The system’s health plan now represents 27% of revenues and ambulatory care accounts for 14%.

SSM’s debt includes 48% fixed-rate bonds and 52% in a floating-rate mode. The system is counterparty to six fixed payor swaps that synthetically convert to a fixed mode 27% of the variable-rate paper. SSM is also counterparty to four basis swaps. The swaps total mark-to-market liability is about $151.4 million, according to rating agencies.

The SSM board in February named Laura Kaiser to replace chief executive officer and president William Thompson. Kaiser, who most recently was chief operating officer at Intermountain Healthcare and previously held leadership positions at another Missouri based system Ascension Health, will take over in May.

SSM’s tax-exempt debt has previously been sold through the Missouri Health and Educational Facilities Authority, the Wisconsin Health & Educational Facilities Authority, and the Oklahoma City Industrial & Cultural Facilities Trust and it has $593 million in direct placements.

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