CommonSpirit returns with $2 billion

Bonds

CommonSpirit Health will price $2 billion of debt Wednesday in a deal that raises some new money while taking the next steps in its tinkering with the combined debt portfolio of Dignity Health and Catholic Health Initiatives.

The Chicago-based system took indications of interest Tuesday on the nearly $1.5 billion of index-eligible taxable paper with corporate CUSIPs with the pricing set for Wednesday along with $626 million of tax-exempts being sold through the California Health Facilities Financing Authority.

Morgan Stanley, Citi, and JPMorgan are the senior managers with Morgan Stanley running the books. The system was created in February 2019 with the merger of California-based Dignity Health and Colorado-based Catholic Health Initiatives which formed one of the largest not-for-profit and Catholic health system nationally.

Catholic Health Initiatives and Dignity merged last year to create CommonSpirit

The system operates 137 hospitals in 21 states with $29.6 billion of revenue. The summer after the merger, it issued $6.5 billion of tax-exempt and taxable debt to restructure debt and raise new money.

“Last year the restructuring created a unified credit structure, generated significant net present value savings and cash flow relief and reduced near term rollover and bank risks. We addressed many immediate priorities but we knew we would be further refining the portfolio in the coming years,” Lisa Zuckerman, senior vice president for treasury and strategic investments, told potential investors in a recorded investor roadshow during which the system’s leadership took investor questions.

“We have savings opportunities and can also address some further de-risking,” she said. “We are also advancing some modest new borrowing given the market conditions.”

In addition to traditional present value savings, some shorter term debt will be moved into a longer term structure to reduce bank and rate risks and about $600 million of new money is being issued for projects and to reimburse the system for capital already spent.

“This transaction continues to reduce risk and provide long-term stability for our capital structure, particularly with a favorable capital market at this time,” said Jean Ham, assistant treasurer.

Ahead of the deal, the system’s ratings in the triple-B category were affirmed.

COVID-19 plays prominently in the offering statement, with 173 references, and in the roadshow where the leadership lays out fiscal and policy measures taken to deal with the impact. The pandemic is blamed for a fiscal 2020’s $550 million operating loss.

The system reported having treated 37,000 inpatients for the disease, including 622 current inpatients. The system paused some capital projects, renegotiated some contracts, implemented temporary pay cuts and furloughs and took a $2.6 billion advance on its federal Medicare payments to aid liquidity. Those funds must be repaid. The system received $1.3 billion in federal CARES Act funding that offsets, but doesn’t fully cover, losses.

The system saw admissions fall 40% in April as elective procedures and surgeries were halted across the country to prepare for a surge in pandemic patients, but those numbers began recovering in May and June. The system said its longer term goal — to achieve an 8% operating margin post-pandemic — remains a strategic target.

The system reported $11.6 billion in daily and weekly liquidity at the close of its fiscal year June 30 that rises to more than $15 billion with additional longer term investments and holdings that could be drawn on if needed. Smoothed maximum annual debt service is estimated at $842.7 million after the transaction.

The new entity landed ratings last year of BBB-plus from S&P Global Ratings and Fitch Ratings and Baa1 from Moody’s Investors Service. The ratings aligned with CHI’s ratings, but were lower than Dignity’s. Fitch and S&P had rated Dignity A-minus and A, respectively. Moody’s rated Dignity A3 with a stable outlook and CHI Baa1. All three rating agencies assign stable outlook to CommonSpirit.

Fitch said the original rating was based on the expectation that as the systems were folded together they would build up profitability in three to five years. “Despite the substantial setbacks created by pandemic disruptions, Fitch believes that the CommonSpirit Health has begun to build the platforms and delivery system needed to reach those goals” in the longer term, analysts wrote in the report.

CommonSpirit eventually aims to achieve $2 billion in savings but the 2023 goal might not be achieved because of the pandemic, Fitch said.

The rating “reflects a very strong enterprise profile offset by a financial profile that we consider adequate,” said S&P analyst Kenneth Gacka. “While the system is large in scale, we believe these enterprise strengths are tempered by the system’s historical operating losses, elevated leverage, and our expectation that operating losses may persist in the near term.”

Moody’s said “the current debt offering will improve debt structure, and slightly decrease peak debt service” but “nevertheless, debt measures will remain modest for the rating category. Our long-term expectation is that the organization will continue to optimize its operating portfolio and strategy, and will gradually improve measures across all categories over time.” Moody’s said it rates $14.6 billion of debt.

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