Trinity Health CEO Richard Gilfallan said the bulk of the system's growth is coming from its non-acute side, such as outpatient and home health visits.

CHICAGO — Trinity Health is hitting the market for its first significant bond borrowings since it merged with Catholic Health East in 2013.

This month's three deals, starting Feb. 3 and totaling $1.45 billion, together mark the largest borrowing to date for Michigan-based Trinity, the nation's second-largest non-profit health care provider, and its debut appearance in the taxable market.

Ahead of the deal, Moody's Investors Service downgraded Trinity one notch to Aa3, citing a lower-than-expected 2014 financial performance and increased leverage associated with the current and future borrowings.

Fitch Ratings and Standard & Poor's affirmed their AA and AA-minus ratings, respectively.

The three transactions spread out over two weeks will feature a mix of tax-exempt, taxable, fixed-rate and variable-rate bonds.

The tax-free piece, totaling $1 billion, will be issued through three conduit issuers pricing on Tuesday, Feb. 3. Bank of America Merrill Lynch is the senior manager.

The borrowing includes $500 million of new money. The team expects to achieve roughly $75 million in interest-rate savings on the $650 million refunding piece.

The taxable chunk, totaling $350 million, is expected to sell Feb. 5 or Feb. 6, with Goldman, Sachs & Co. acting as the book-running senior manager.

A $100 million floating-rate note deal with maturities of 10 years or under is expected to price around Feb. 18, according to the finance team.

The bonds are general unsecured obligations of the Trinity Health Credit Group. The transactions fund a $3.3 billion, three-year spending plan financing various capital projects across Trinity's 21-state footprint.

"It's a very attractive environment for us to be issuing debt in," said Dina Richard, Trinity's senior vice president of treasury and chief investment officer, noting historically low interest rates for both taxable and tax-exempt debt. "We've been growing at 10% annualized rate since 2010 and we've had a strong and consistent financial performance and a very strong balance sheet," said Richard. "There's a lot happening in our future."

The team has traveled to investor conferences to promote the deal and posted a pair of road shows accompanying the preliminary official statements.

In the road show, they touted Trinity's consistent financial performance, strong balance sheet and a growth strategy designed to help navigate a changing health care landscape.

The finance team opted for the tax-exempt, taxable, fixed- and variable-rate mix to take advantage of the market and capitalize on the flexibility that comes from issuing taxable debt, said Mark Melio of Melio & Company, the system's financial advisor.

"The structure reflects Trinity's appreciation for the historically low fixed-rate interest rates," Melio said. "We have a large component of advance refunding bonds that need to be fixed rate and there's also a real advantage to issuing taxable in this market," he said. "The floating rate notes also present a terrific risk profile, in terms of being sold to investors out by five, seven or 10 years."

Based in Livonia, Mich., Trinity, a Catholic system, merged with Catholic Health East in 2013. The merger created the second-largest health care system in the country, with $13.6 billion in annual revenues and encompassing 86 hospitals across 21 states. Only St. Louis-based Ascension Health is larger.

The provider carries $4.8 billion of debt. Of that, roughly 67% will be fixed-rate after the upcoming deals. The system also carries debt that has been privately placed.

With the federal health care reform law, Trinity's size is considered important to its ability navigating a shifting sector that increasingly is favoring large systems over small, stand-alone hospitals.

"I personally am a big fan of the larger systems because I think they'll survive well in the complicated health care environment," said Alan Schankel, managing director at Janney Capital Markets. He noted that Trinity has $7.1 billion in liquidity - which translates into 208 days cash-on-hand - and said economies of scale are helpful to large systems like Trinity.

Schankel said he expects to see some investor appetite for the paper because as a hospital bond it will give "a little more yield than traditional double-A, and everyone is looking for yield."

In a net road show promoting the deal, CEO Richard Gilfillan said Trinity is in the midst of implementing a new strategy to transform it into to a more patient-centered organization.

"We believe that with health care reform really taking off now, the marketplace is demanding fundamental change in how we operate and what we produce," said Gilfillan. "We've said our goal is to become a people-centered health system that's fundamentally grounded in a deep understanding and appreciation for what people, what patients need when they're accessing our system and when they're in our community."

Gilfillan said the bulk of the system's growth is coming not from its acute-care side but from its non-acute side, such as outpatient and home health visits.

Trinity expects to finance roughly $3.3 billion of capital needs - spending $1.1 billion a year — through the end of 2017, said Marianne Cunningham, vice president of debt management. By the end of the period, the provider expects to have taken on roughly $800 million in new net debt.

The new debt could pressure the system, Moody's warned in its downgrade report. The negative ratings action reflects Trinity's "lower than anticipated financial performance" in fiscal 2014, analysts said.

"The ratings also reflect the increase in debt associated with the proposed financing and the effect on debt-service coverage and leverage measures," Moody's said. "The acquisition strategy notably increases the business and financial risks of the system."

Moody's revised its outlook to stable from negative at the lower rating, and praised the system for its large footprint and good cash flow diversification.

In response to the downgrade, Cunningham stressed the system's balance sheet and liquidity and a maximum annual debt service coverage that's expected to be 4.39 times after this month's issuances.

"We think we have a very, very strong operating revenue and what we consider to be moderate leverage," Cunningham said. "We understand that ratings agencies have their own methods and models and we're very comfortable that S&P and Fitch reaffirmed their ratings."

The investor risk section in preliminary bond documents totals 40 pages, signaling in part the uncertain regulatory and policy landscape in the national health care sector.

Other risks are tied to the system's debt portfolio, including the remarketing risk tied to $1.4 billion of variable-rate demand bonds and the interest-rate swaps that hedge a chunk of its debt. The notional value of Trinity's swaps is $2.4 billion, with a potential termination liability of $110 million, according to bond documents.

The $1 billion tax-exempt offering includes a mix of serial and term bonds and will be issued through the Michigan Finance Authority, Idaho Health Facilities Authority, and Montgomery County, Md.

The $350 million taxable deal features a 30-year bullet maturity.

Trinity is conducting a "quasi-competitive" sale of the $100 million of floating rate notes, in which nearly all of the underwriting firms that are on the tax-exempt transaction will bid on the notes, according to Melio.

The notes' maturity has not yet been set. That deal will go through the Michigan Finance Authority.

Hawkins Delafield & Wood LLP is Trinity's bond counsel.

In addition to BofA Merrill Lynch and Goldman Sachs, the tax-exempt syndicate includes JPMorgan, Cabrera Capital Markets LLC, Loop Capital Markets and Wells Fargo Securities.

The taxable team includes Goldman, Sachs, BofA Merrill Lynch, JP Morgan and Wells Fargo.

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