DALLAS – With plans to continue its rapid growth, Baylor Scott & White Health is preparing to issue $918 million of taxable and tax-exempt bonds.
In addition to raising money for future growth, the deal is expected to include refunding for a 2010 series of bonds.
With this deal, the health system will have about $1.5 billion of outstanding debt, according to Moody's Investors Service.
Created by the 2013 merger of two major health networks, BSWH ranks as the largest not-for-profit health system in Texas.
The issue expected to price the week of April 4 includes $536 million of taxable and $382 million of tax-exempt bonds, both rated Aa3 by Moody's and AA-minus by Standard & Poor's. Outlooks are stable.
Moody's sees strengths in BSWH'S size, its geographic diversity, favorable demographics, strong revenue growth and "proven track record of executing integration and growth strategies."
"BSWH has an aggressive growth strategy, which brings execution risks and significant cost, but the system has a strong track record of evaluating opportunities and executing strategies while maintaining operating focus and balancing affordability with resources," Moody's analyst Lisa Martin wrote in her March 17 report.
The Scott and White Health Plan is growing membership in the North Texas region with plans to expand statewide, Martin wrote. The system recently entered into two joint ventures with Tenet to operating five hospitals as the majority owner in the North Texas region.
The 2013 merger of the Baylor and Scott & White health systems combined $8.3 billion of assets, including 43 hospitals in 24 counties of Texas. The merger came as hospitals nationwide were bulking up to withstand new federal regulations under the 2010 Affordable Care Act.
The system is targeting close to $600 million in total operating improvements and synergy benefits that began in 2014, according to Moody's. BSWH achieved about $240 million in improvements in FY 2015 and is targeting about $140 million in FY 2016.
The largest initiatives involve centralization of and improvements in revenue cycle, supply costs including pharmaceutical costs, and retail pharmacy, Moody's said.
Like all hospitals in Texas, BSWH faces uncertainty over the future of Medicaid payments as the state seeks an extension of its 2011 waiver from the federal government.
The original waiver was granted after the state refused to expand Medicaid coverage to the working poor as prescribed by the Affordable Care Act. Instead, Texas' Republican leaders sued the federal government in hopes of getting the ACA overturned. The state achieved a partial victory when the U.S. Supreme Court modified the law to allow states to opt out of health care exchanges.
Other challenges facing the system include a leveraged balance sheet while managing an aggressive growth strategy amid high competition, Martin said.
"The stable outlook reflects expected stable absolute cash-flow levels to support the proposed incremental debt, sustained cash-flow margins at or close to current levels, and an ability to largely offset possible reductions in Medicaid funding given the system's track record of executing operating improvement strategies," Martin wrote.
The fact that Texas does not require a certificate of need for hospital expansions also poses a challenge for BSWH and other competitors, Moody's said.
"BSWH benefits from high 7-8% population growth over a five-year period in many markets, but the absence of CON regulations attracts well-funded competitors including large not-for-profit and for-profit healthcare systems," Martin said.
BSWH has about 21% total market share across North Texas and about 24% total market share across the Central Texas, Moody's said.
