The Illinois Finance Authority greenlighted $1.4 billion of borrowing plans at its June meeting, led by Presence Health's preliminary plans to restructure debt as it works to stave off further credit erosion.
The board authorization granting initial approval to an up to $1.2 billion financing allows Presence Health some room for new money issuance in addition to the refunding and restructuring of up to $1 billion of existing debt, which would provide breathing space for a new administration's initiatives aimed at improving fiscal results.
The IFA board had expedited approval during a special meeting in late May of a $530 million variable-rate, short-term financing that staved off potential liquidity demands for the system. Presence's 2015 operating results triggered technical covenant violations on coverage ratios that could have forced accelerated debt repayment.
JPMorgan directly purchased the securities taking out other banks on the existing financing.
"The corporation intends to refund the Series 2016 Bonds and all other parity debt outstanding…on or about August 15, 2016, but there is no assurance the Series 2016 Bonds or any other series of bonds will be refunded or, if they are refunded, when such refunding will occur," IFA documents say.
JPMorgan is the system's banker on the proposed financing. Kaufman Hall is advising Presence, while Chapman and Cutler LLP is bond counsel. The system must return to the IFA board for final approval.
The system's credit has tumbled this year, and the short-term debt restructuring fell short of fending off a hit from Moody's Investors Service, which this month downgraded the not-for-profit healthcare system's issuer rating one notch to Baa3. Presence is at risk of losing its investment grade status, as Moody's assigned a negative outlook.
"The downgrade to Baa3 follows poor operating performance in fiscal year 2015, reflecting both recurring operating pressures and several large adjustments," Moody's said. "The rating incorporates the expectation that cash flow challenges in fiscal year 2016 and early fiscal year 2017 will result in liquidity contraction."
"Although improved with a recent restructuring, the less than optimal debt structure presents short-term liquidity risk, including modest headroom to financial covenants," Moody's added.
The system benefits from its role as a large and diversified health system and the swift actions of a new senior management team, Moody's said. Cash flow for the first four months of the new fiscal year is better than expected.
Presence Health owns and operates 11 hospitals, 27 long-term care and senior living facilities, physician practices, clinics, diagnostic centers, home health, hospice and other healthcare services in the Chicago area and east central Illinois that generate about $2.5 billion in revenue annually. It was established in 2011 when Provena Health and Resurrection Health Care joined forces, creating the largest Catholic system in the state.
S&P Global Ratings in March lowered the system two notches, to BBB-minus from BBB-plus, and put the rating on CreditWatch with negative implications. Fitch Ratings lowered the system's rating one notch to BBB and put it on negative watch, also in March. A one notch drop from S&P would land the system in the junk category, while Fitch's rating is two notches into investment grade.
In an investor presentation posted earlier this year, Presence said it was undertaking an "aggressive turnaround" plan that has identified $170 million to $255 million of potential savings over a two-year time frame. The system blames some of the operating losses on poor billing collections.
New management took over the system in late 2015, led by Michael Englehart, who became president in October. Officials launched a fiscal review that resulted in accounting adjustments.
"Reasons for the adjustments include a change in reserve methodology, prior year adjustments, and write-offs," IFA documents said. The hit to operating results could have forced accelerated debt repayment absent the short-term restructuring.
Presence has stressed with investors its $900 million in cash and investments, its up-to-date payment of all scheduled principal and interest payments, and its turnaround efforts. "Presence is in the process of implementing these expeditiously with the assistance of several external resources, including Crowe Horwath, Huron Healthcare and Xtend Healthcare," the IFA said.
"Yes, in the short term the bond ratings may affect the cost of future borrowings and some of our current debt, as well as create operational challenges. In the long term however, the actions we're already taking will make us stronger and more effective as an organization going forward," Englehart said earlier this year.
The IFA board also advanced Bloomington-based Illinois Wesleyan University's financing of up to $87 million, primarily to refund existing debt. RBC Capital Markets is serving as senior manager with Morgan Stanley and PNC Capital Markets in the role of co-managers. IWU currently carries a rating of Baa1 from Moody's and A-minus from S&P.
"The proposed Series 2016 Bonds will reduce monthly payments that will help Illinois Wesleyan University keep its fixed charges as low as possible," the IFA said of the deal. "The university intends to use the funds made available by the lower debt service obligations to pay for numerous repair and maintenance projects to extend the useful lives of existing buildings on its campus."
The board approved up to $90 million of new money and refunding issuance for Kankakee-based Riverside Health System. Riverside carries ratings in the single A category. Barclays would serve as underwriter.
A portion of the proceeds would finance the costs of acquiring, constructing, renovating, remodeling and equipping certain health facilities owned by Riverside which operates a medical center, senior living facility and other assets.
The board also advanced a $1.3 million direct loan to the city of Blue Island for an issue of 10-year alternate revenue bonds at a rate of 3% under the IFA's local government direct bond purchase program. Proceeds will finance capital improvement projects that include sewerage system upgrades, improvements at a city-owned golf course, and reimbursement of costs to acquire a new ambulance.
This proposed loan resumes the authority's activity in providing financing for non-rated units of local government at market-based interest rates for the first time since the defeasance and redemption of the IFA Local Government Bond Bank in June 2014. The former structure was more costly and exposed state taxpayer dollars through a moral obligation backing.
"We hope that the City of Blue Island transaction will become a template for future financing assistance to Illinois local governments," said executive director Christopher Meister.
