St. Joseph Health System and Hoag Memorial Hospital Presbyterian, two California hospital systems that formed an affiliation in February, plan to price $763 million in debt on Wednesday.

The bonds are being issued through the California Health Facilities Financing Authority, whose board approved an issuance up to $850 million for St. Joseph during its May 30 meeting.

Morgan Stanley will act as the underwriter on the fixed-rate offering, the largest deal on the municipal primary calendar this week.

The bonds have been rated AA-minus by Fitch Ratings, A1 by Moody’s Investors Service, and AA-minus by Standard & Poor’s.

The majority of the proceeds – roughly $650 million – will be used to pay down Hoag’s outstanding debt, said Jo Ann Escasa-Haigh, chief financial officer for St. Joseph Health.

The remainder, of up to $200 million, will be used for reimbursements for capital projects and to fund new or existing projects primarily at three California hospitals.

The two hospital systems chose an affiliation, as opposed to a joint operating agreement, because St. Joseph’s wanted to retain its Catholic faith-based identity and Hoag’s wanted to maintain its Presbyterian identity.

Hospital officials emphasized it was not a merger, but a new holding company formed to better integrate medical care and to eliminate duplicative services.

Known as Covenant Health Network, the affiliation stretches from Orange County to the High Desert area of California.

Richard Afable will serve as president and chief executive officer for CHN. Afable will also serve as executive vice president for the Southern California region of St. Joseph Health. He has served as Hoag’s president and CEO since 2005. Robert Braithwaite was appointed by Hoag’s board of directors to succeed Afable as Hoag’s new president and CEO. He formerly served as Hoag’s COO.

The California attorney general’s office approved the affiliation on March 1.

The hospital systems decided to form an affiliation because the synergies between the two enable them both to better meet the challenges anticipated as the universal healthcare legislation is rolled out, officials said.

The wave of change sweeping through healthcare, part of which is coming through the new federal legislation, is for hospital systems to be reimbursed for the health of the patient as opposed to being reimbursed for procedures, Escasa-Haigh.

“Being able to provide a continuum of care using both of our networks is advantageous to the community,” Escasa-Haigh.

Both hospital systems have been working toward becoming full-service providers for patients.

For instance, they said, the patient could stay within the system to receive a standard consultation with a family doctor through a continuum extending to a hospital stay.

In addition, officials said that both hospital systems have embraced the concept of offering services to help patients make lifestyle changes or catch problems earlier, so that more invasive procedures are not needed later.

The focus is on trying to lower costs across the spectrum by creating an environment that improves the health of the entire population served by the hospital system, Escasa-Haigh said.

Both hospitals have completed 92% of the construction needed to meet seismic mandates required to be completed by 2015, said Sonya Shaw-Grabow, director of treasury services for St. Joseph Health.

All three rating agencies deemed the addition of Hoag accretive to St. Joseph’s balance sheet.

“The ratings are higher for both St. Joseph’s and Hoag than they were separately,” Escasa-Haigh said.

The planned issuance will increase the amount of outstanding debt held by St. Joseph to $2.5 billion.

St. Joseph hasn’t set a target in terms of what kind of interest rates it hopes to achieve, but Escasa-Haigh is confident the bonds will price well.

“We all feel that the market (in terms of interest rates) has been at an all-time low, for a sustained period of time,” Escasa-Haigh said. “I did the math, I suspect I would find that 85% of the time in recent history, the markets have been higher.”

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