Wheaton Franciscan Health System Plans $70 Million Issue This Month

CHICAGO — Wheaton Franciscan Services Inc. will enter the market late this month with a roughly $70 million new-money and refunding variable-rate issue as the health care system struggles to overcome operating challenges in several of its markets that have affected its credit rating. Wheaton Franciscan operates two corporate offices, one out of Wheaton, Ill., and another in Milwaukee.About $50 million of the upcoming sale will refinance taxable, variable-rate debt sold in 2003 to finance construction of the Wisconsin Heart Hospital. The shift to tax-exempt debt will result in substantial savings of up to $1 million annually, according to Wheaton chief financial officer William Blum. Another $20 million would finance several projects at the system’s facilities.The original Heart Hospital debt didn’t qualify for a tax-exemption because of the system’s partnership in the facility with a private physicians’ group. Wheaton bought out the group and assumed full ownership of the hospital in December 2006, paving the way for the tax-exempt refinancing. Officials are also pushing the debt out a few years to 30 years to fit into the system’s overall debt portfolio of about $900 million.“This will smooth out our debt service schedule,” Blum said.Citiis the underwriter while Ponder & Co. is serving as financial adviser. The Wisconsin Health and Educational Facilities Authority, which is serving as the conduit, recently approved the transaction. Quarles & Brady LLP is bond counsel, Katten Muchin Rosenman LLP is legal counsel to Wheaton and Jones Day is underwriters’ counsel. JPMorgan Chase is providing a letter of credit.Officials had originally planned to refund about $75 million of floating-rate debt sold also sold in 2003 but renewed a letter of credit from U.S. Bank at a price that proved more economical to leave the debt outstanding, Blum said.Ahead of the sale, Moody’s Investors Service downgraded the credit to Baa1 from A3 and assigned a negative outlook, while Standard & Poor’s revised its outlook on the A-minus credit to negative from stable. Both agencies had downgraded the credit last year as it entered the market in the fall with a $300 new-money and refunding sale, attributing the action to a sharp 37% increase in Wheaton’s debt load. Analysts at both rating agencies attributed their latest action to concerns over Wheaton’s improved but still poor operating performance and ongoing competitive challenges in its Wisconsin and Iowa markets. The system also operates facilities in Colorado and Illinois.“Over the next year, we expect Wheaton Franciscan Services Inc.’s financial profile to remain at a minimum consistent with the current year,” Standard & Poor’s analyst Suzie Desai wrote. “However, to return to the stable outlook, WFSI must begin to show improvement both in operations and on its balance sheet, particularly liquidity, over the next 18 to 24 months.”Moody’s took a slightly gloomier view, with analysts writing that the downgrade reflects the impact of unanticipated operating challenges in Fox Valley, Wis., and Waterloo, Iowa, that have “exacerbated ongoing operational challenges stemming from the system’s southeast Wisconsin market.” Those struggles have resulted in lowered cash balances. Fiscal 2006 was the second consecutive year that Wheaton saw a decline in operations.“The negative outlook reflects our concerns that existing and emerging competitive challenges will continue to suppress operations. We believe these issues could make it difficult to achieve operating targets necessary to support capital projects and maintain cash despite initiatives to improve operations,” Moody’s wrote.The system commands a strong market position in its areas, which is viewed positively by analysts, but it’s the competition faced from both other hospitals and physicians in several markets that has Moody’s concerned. In its largest market in the Milwaukee area, where it operates four hospitals following the closure of it St. Michael’s Hospital last year, Wheaton holds 21% of the market compared to Aurora Health’s 36%. Moody’s said it remains concerned over Wheaton’s ability to capture the growing suburban market.The system also faces increased competition in Fox Valley and Waterloo due to increased services from its competitors. Those two areas had typically been considered strongholds for Wheaton. The system, which has taken on a significant increase in its debt load in recent years, also has a $275 million capital program for the next two fiscal years, though no new-money issuance is planned in the near term.Wheaton has attempted to control costs by shuttering its St. Michael’s Hospital, which is located near its St. Joseph’s Hospital in the Milwaukee area, and is building an outpatient facility in the suburb of Franklin located between Milwaukee and Racine, Wis., in hopes of capturing more suburban growth.“We are doing a better job of controlling costs and are looking out over the next two to three years for our strategies to work,” Blum said. After closing out fiscal 2006 with a negative 0.4% operating margin, Wheaton’s performance has improved through the first nine months of fiscal 2007, with 0.7% operating margins that generated a debt service coverage ratio of 2.7 times. The system had more than 72,000 admissions in fiscal 2006 and operating revenue totaling $1.7 billion. The organization includes more than a dozen hospitals, long-term care facilities, home health agencies, and 70 clinic sites.