Kennestone Hospital in Marietta, Ga., shown here, anchors the 11-hospital WellStar Health System.

BRADENTON, Fla. – WellStar Health System has become Georgia's largest nonprofit health care provider, at the expense of the system's credit ratings.

WellStar, a five-hospital system, closed Friday on its latest transaction, boosting its network with the acquisition of five acute care hospitals from for-profit Tenet Health, and merging with the nonprofit West Georgia Health.

The debt-financed deal required a $600 million bridge loan from Bank of America and the assumption of an $80 million capital lease, prompting Moody's Investors Service to drop WellStar's ratings two notches, to A2 from Aa3, on Thursday.

The downgrade impacts $448 million of outstanding revenue certificates issued on behalf of WellStar by the Hospital Authority of Cobb County, Cobb County Kennestone Hospital Authority, and Paulding County Hospital Authority.

The outlook is stable.

The lower rating was due to the financing, which materially increased the system's debt load and balance sheet metrics, according to Moody's analyst Lisa Goldstein.

The A2 rating also acknowledges WellStar's strong position as a large integrated healthcare delivery system with leading and growing market share in northwest metro Atlanta, a track record of strong operating performance providing ample debt service coverage, and the expectation of a smooth transition, Goldstein said.

In January, Standard & Poor's lowered its long-term underlying ratings two notches, to A from AA-minus, saying the decision was in response to the definitive acquisition agreement that WellStar signed on Dec. 1.

Changes in the system's credit ratings were anticipated as WellStar implemented strategic initiatives to expand into new communities, said chief financial officer Jim Budzinski.

"Our acquisition of Tenet's five metro Atlanta hospitals as well as the merger of West Georgia Health System into WellStar are positive steps for the system, our current patients and the patients of the new communities we will serve," Budzinski said in a statement to The Bond Buyer.

WellStar will continue to pay debt service and "provide world-class healthcare to patients," he added.

Budzinski said WellStar's expansion move is a "proactive response" to the changing healthcare landscape.

Those changes are largely due to implementation of the Affordable Care Act and consolidation particularly among smaller, rural hospitals.

WellStar Health System had $1.8 billion in revenue and 85,000 total admissions in fiscal 2015, operating five acute care hospitals in Atlanta as well as Cobb, Paulding and Douglas counties.

After Friday's purchase and merger, WellStar is now an 11-hospital system in metro Atlanta with projected revenues around $3 billion and 113,000 admissions, according to Moody's.

The additional hospitals expand WellStar's footprint into Fulton, Spalding, Butts, and Troup counties.

"WellStar will be the largest provider in metro Atlanta with an estimated market share of 21%, but will face more direct competition from the other large health systems in Fulton County," Goldstein said.

In addition to $448 million of Moody's-rated debt, WellStar had $490 million of direct debt, including $31.3 million of fixed-rate revenue certificates guaranteed by Paulding County.

The health system expects to refinance the bridge loan and issue additional debt for capital projects in the first half of fiscal 2017, although the structure of the future financing is currently unknown, Moody's said. WellStar acquired the Tenet Healthcare hospitals for an estimated $661 million, including a $575 million acquisition cost and the assumption of $86 million of debt, S&P said in its January downgrade report.

The strategic expansion initiatives employed by WellStar "should position the organization to succeed as the health reform delivery model evolves," S&P analysts said, adding that future rating actions will hinge on management's ability to successfully integrate the acquired hospitals into the system while maintaining strong operations and cash flow.

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