Advocate Aurora Health heads into the market Tuesday with a long planned $700 million taxable issue buoyed by some positive momentum for a sector that has seen balance sheets ravaged by the COVID-19 pandemic.
The Downers Grove, Illinois-based system, created by the 2018 merger of Illinois’ largest not-for-profit system — Advocate Health Care — and Wisconsin’s largest system — Aurora Health Care — offers a mix of new money and refunding bonds due in 2030 and 2050. Ahead of the sale, rating agencies affirmed the system’s ratings in the double-A category.
JPMorgan and Citi are lead managers. Kaufman Hall is adviser.
The deal’s structure remains the same as the system planned for several months. The finance team held off on the deal due to market turbulence, but that’s eased over the last two weeks. Advocate is ready to follow other major Midwest systems that priced recently, including Ascension and NorthShore University HealthSystem, since it is now comfortable with rates and investor interest.
“We’ve been watching rates very closely and the market is performing better” after the volatility seen in March and earlier this month, said James Blake, a managing director at Kaufman Hall. “Absolute yields remain low and for high-quality issuers like Advocate, deals are getting done and the market is very accepting.”
Hospitals and health care systems that headed into the pandemic in weaker condition may face a tougher road on rates.
An infusion of federal aid and an eye on the future, when elective surgeries resume, will also help, Blake said. “I think people realize that what we are in is a mandated temporary situation but the essentiality of the sector is still absolutely there and investors, along with everyone else, realize the essentiality of hospital delivery,” Blake said, noting investor calls begin with expressions of gratitude from the buyside.
The pandemic’s double blow to hospitals from rising personnel and equipment costs and then the loss of revenue from elective procedures, has taken a steep toll on revenues and rating agencies carry a negative overall view of the sector.
Hospitals' median operating earnings before interest, taxes, depreciation, and amortization fell more than 100% compared to the same period last year.
The mean EBITDA margin dropped 13 percentage points relative to March 2019, from about 1% to negative 12%.
Final results are not yet in, but AAH expects a $168 million drop, or 15%, in expected revenues for March with a preliminary operating loss of $71 million expected for the quarter ending March 31. The system is managing part of the strain with a hiring freeze for some positions, it put off equipment purchases and will delay $400 million in capital spending through the year, according to the offering statement.
AAH generates about $12.8 billion in revenue annually. The system benefits from strong liquidity that is expected to partly absorb the impact of COVID-19, including $8.9 billion of investments and $1.7 billion of current availability under bank lines, commercial paper, and liquidity from the investment program within 3 days. AAH also is working on finalizing a syndicated credit facility for about $1 billion.
Hospital finances still remain under siege but headwinds have eased a bit, given the infusion of another $75 billion for hospitals in the $484 billion relief package signed by President Trump late last week and the expected resumption of profitable elective procedures, according to market participants.
The $75 billion comes on top of $100 billion that was included in the Coronavirus Aid, Relief, and Economic Security package signed March 27. Hospitals can also bolster liquidity through a measure that allows for the acceleration of six months worth of expected Medicare reimbursements. The Advocate system has applied to accelerate $700 million in Medicare payments.
The good news of additional aid is tempered with caution in that it will only go so far. “Although the new funds will further curb some of the industry's losses caused by the suspension of elective services and increased costs to fight the coronavirus, we do not believe it will fully compensate providers, and still expect hospitals to suffer material losses and reductions in cash flow over the coming months,” Moody’s Investors Service analyst Dan Steingart said in a special commentary.
Hospitals across the country have begun moving at various speeds to resume various elective surgeries and diagnostic testing based on recent federal guidance. Some hospitals followed the initial federal guidance putting such procedures on hold. Several states went further and actually prohibited the procedures to preserve room to treat expected spikes in COVID-19 cases.
Illinois Gov. J.B. Pritzker last week extended the state’s stay at home order to the end of May, but is relaxing rules on elective procedures beginning May 11. Hospitals must meet certain thresholds relating to available beds, the ability to handle a surge in COVID-19 cases, personal protection gear availability, and will be required to test surgical patients for the virus ahead of the procedure.
Wisconsin Gov. Tony Evers has extended a safer at home order to May 26, but hospitals can decide the timing on when they resume non-emergency procedures. Various hospitals have begun to lay out timelines, while others have said they are not yet ready for such pronouncements.
AAH’s offering statement illustrates the mounting toll and risks associated with COVID-19, which is referenced 71 times. That compares to just a handful of mentions in offering statements from healthcare deals last month.
The offering statement lays out information about the pandemic’s spread, the material negative operating impact, the economic and behavioral impacts that have occurred and loom longer term, market disruptions, government aid programs, the impact on capital planning, surge planning and how it’s providing COVID-19 care.
The system set up a COVID-19 command center in January 2020 to coordinate its response. “The system has been able to accommodate the increase in in-patient COVID-19 related volumes,” the statement nolted.
About $500 million of the proceeds of the upcoming deal will fund corporate purposes, including capital projects, and the remainder will refinance debt.
Ahead of the deal, Fitch Ratings and S&P Global Ratings affirmed Advocate’s AA rating and stable outlook. Moody’s affirmed its Aa3. Moody's assigns a positive outlook on $2.8 billion of debt.
The rating reflects Advocate’s “broad and diverse position across two states, leading and stable position in the market as a whole, and healthy balance-sheet measures with light pro forma debt," said S&P analyst Suzie Desai.
Moody’s warned the coronavirus outbreak “will have a significant impact and likely protract the time period in which AAH will benefit from further synergies and enterprise growth” but “as seen over the last 18 months, the rating and outlook expect that AAH will maintain low leverage, a favorable liquidity position, and healthy long-term margins, despite the near-term impact from COVID-19.”
In affirming its rating, Fitch noted the potential for change as the pandemic’s toll is assessed despite Advocate’s sound financials. “The stable rating outlook reflects that the system can withstand expected considerable pressure from the coronavirus pandemic. If, however, should operating disruptions negatively affect AAH more than Fitch anticipates and the balance sheet weakens significantly, a Negative Outlook could be warranted over time,” Fitch warned.
The system operates 26 hospitals and one behavioral health hospital. The system has a tentative agreement to sell two central Illinois hospitals to the Carle Foundation for $190 million. AAH is also participating in a proposal that would spin one of its hospitals to form a not-for-profit system on Chicago’s south side.
