More than $1 billion of Illinois-based not-for-profit health and higher education paper will hit the market in the coming weeks.
NorthShore University Health System plans to sell next week new-money and refunding debt next week that will wrap into its debt portfolio bonds issued by its newly acquired Swedish Covenant Hospital in Chicago.
The deal totals about $434 million in three series with a fixed-rate tranche for $334 million and two series for $50 million each that will initially bear interest at a long-term rate until mandatory tenders in seven to 10 years.
“Bond proceeds will be used to refinance all existing debt and issue an additional $50 million in new debt to preserve unrestricted liquidity for future strategic initiatives. The plan of finance generates savings on existing debt and integrates Swedish Covenant's debt,” S&P Global Ratings said in a report on the transaction.
The Illinois Finance Authority is serving as conduit issuer and its board signed off on the deal last month. Goldman Sachs has the books and JPMorgan is co-senior manager. Nixon Peabody LLP is borrower’s counsel and Chapman and Cutler LLP is bond counsel. Hammond Hanlon Camp LLC is advising the hospital and Sycamore Advisors LLC is advising the authority.
The system operates several hospital all located in the north suburbs of Chicago. It extended its reach to Chicago with the acquisition of Swedish Covenant on Jan. 1. As part of the financing, the system is executing a new and restated master trust indenture that allows for a substitution of notes without bondholder consent.
“In connection with this transaction it is anticipated that a new master trust indenture will be put in place with the borrower as the sole obligated group member, and Swedish and NorthShore Faculty Practice Associates as restricted affiliates,” IFA documents said.
Ahead of the sale, Moody’s Investors Service cut the system’s rating by one notch to Aa3 from Aa2 and assigned a stable outlook. S&P Global Rating rates the system AA-minus and in conjunction with the issue raised its rating on Swedish Covenant to AA-minus from BBB.
“The downgrade to Aa3 from Aa2 is due to growing competition from larger health systems, especially in recently acquired Swedish Covenant Health's very competitive market, and revenue constraints from growth in Medicare and Medicaid,” Moody’s said. “These fundamental changes in the market landscape and payer mix, along with the initial dilutive impact of Swedish, will result in modest margins for several years even considering expected improvement.”
The rating anticipates the system will maintain its leading market position in an affluent area as accelerated growth strategies compensate for an increasingly competitive region.
S&P said the system benefits from a strong balance sheet, strong demographics and good market presence in a competitive area with competition and the risks associated of integrating Swedish Covenant offsetting the strengths.
"The stable outlook reflects our view that NorthShore will maintain very strong balance-sheet metrics and low leverage given its manageable capital plans," said S&P Global analyst Anne Cosgrove.
The University of Chicago plans to sell more than $400 million in a mix of taxable and tax-exempt tranches. A $162 million tax-exempt series that matures in 2054 and a $151 million taxable series will sell next week. The university will return in the next month with a $73 million series and a $40 million forward purchase series. The IFA will issue the $162 million, $73 million, and $40 million tranches.
Proceeds will convert taxable commercial paper to a long-term, fixed-rate; remarket some debt switching from a put structure with mandatory tenders to a fixed-rate; convert the balance on an operating line to long-term, fixed-rate debt; and forward refund a portion of its 2012 bonds maturing in October.
RBC Capital Markets LLC is the senior manager with several others firms serving as co-senior and co-managers. PFM Financial Advisors LLC is advising the school and Sycamore is advising the authority. Chapman LLP is bond counsel.
The university carries current ratings of Aa2 from Moody’s, AA-minus from S&P, and AA-plus from Fitch Ratings. All assign a stable outlook.
S&P’s rating reflects the university's extremely strong enterprise profile, supported by exceptional student demand, and an impressive market position and fundraising.
The positive factors are partially offset by modest operating margins and continuing deficits at the university that are in part offset by its health system’s profitability, and a high debt burden.
"The stable outlook on the long-term rating reflects our expectation that during the next two years, UChicago will continue to reduce operating deficits for university-only operations, eliminate reliance on supplemental draws, and realize continued fundraising success," said S&P analyst Jessica Wood.
The school, founded in 1890 by John D. Rockefeller, has more than $4 billion of total debt.
“The assignment of the Aa2 rating and maintenance of existing ratings reflect University of Chicago's excellent strategic positioning anchored by global prominence as an elite research university with extremely strong undergraduate demand,” Moody’s said. “The university remains highly leveraged and has rising debt service obligations against relatively weak operating performance.”
The university reports cybersecurity as a bondholder risk in its offering statements, outlining how computer networks and data transmission and collection are vital to efficient operations. It has implemented network security measures but “may be vulnerable to deliberate attacks by hackers, malware, ransomware, or computer viruses.”
“Any such disruption, access, disclosure, or other loss of information could result in reputational damage to the university and have an adverse effect on the university’s operations and financial condition,” the offering statement reads. “Further, as cybersecurity threats continue to evolve, the university may be required to expend significant additional resources to continue to modify and strengthen security measures, investigate, and remediate any vulnerability or invest in new technology designed to mitigate security risks.”
The university has floating- to fixed-rate swap contracts on a notional amount of $77 million and $94 million with Morgan Stanley and Merrill Lynch, respectively, as counterparties. Last October it entered into a forward off-market swap and a swaption with its 2012B and 2013B bonds, respectively, to lock in upfront savings.
The swaps are structured such that debt service is not expected to change. “We do not believe the swap program poses significant risk to UChicago's credit quality, particularly given the magnitude of the university's financial resources relative to any potential swap-termination liability,” S&P said. “The structure is also well matched to the underlying debt and carries a wide ratings trigger spread.”
Moody’s said in a commentary on the October swap transaction the university modestly increased effective leverage, adding some risks to its debt structure and reduced its capital structure flexibility, with the transactions but the credit impact was limited. The university received upfront payments of $121 million from the counterparties, bolstering cash and investments in the near term, and recorded a swap liability of $141 million. Proceeds funded capital improvements.
Rush System for Health is planning a $300 million new-money and refunding taxable issue. Rush operates three hospitals — its flagship academic center Rush University Medical Center in Chicago and two community hospitals Rush Oak Park Hospital and Rush Copley Medical Center both in suburban Chicago.
Ahead of the sale, Fitch Ratings affirmed the system’s AA-minus that’s also assigned to the system’s $457 million of 2015 debt sold through the IFA.
Fitch expects Rush “will maintain strong capital-related ratios through the five-year cycle in Fitch's forward-looking scenario analysis stress case.”
“While operating in a competitive metropolitan area, Rush has a broad reach for high-acuity services as a leading academic medical center,” Fitch added.
Rush recorded just over $2.6 billion in audited operating revenue in fiscal 2019 with unrestricted ash of investments of $1.3 billion. The system has a long term $1.3 billion capital plan with a focus on ambulatory care and expansion.
Moody’s rates a total of $730 million of debt including the new issue A1 with a stable outlook. “Rush's A1 rating reflects its reputable academic medical center and solid market presence. New senior management will focus on partnerships and innovative applied research, which will likely help better position the system.”
Rush’s long-serving chief executive, Larry Goodman, retired last year.
New senior executives include CEO Ranga Krishnan, previously the dean of Rush Medical College. Omar Lateef is now CEO of the medical center after having served as the chief medical officer since 2015. Sherine Gabriel joined Rush University last year as president after a stint as dean of the Rutgers Robert Wood Johnson Medical School.
