New affiliation lifts a Minnesota hospital's bond prospects

Duluth, Minnesota-based St. Luke's Hospital's new affiliation with Wisconsin-based Aspirus has lifted the prospects for its speculative-grade bonds.

S&P Global Ratings placed the hospital's BB-plus rated bonds on CreditWatch with positive implications April 5, citing the March transaction which made Aspirus responsible for all of St. Luke's debt.

A CreditWatch positive typically means that S&P expects to make a rating upgrade in the next 90 days, according to S&P's guide. However, the rating change is not set in stone and may hinge on future events.

St. Luke's Duluth

On Oct. 5, S&P dropped the long-term rating on the Duluth Economic Development Authority's Series 2022A and B and Series 2021A revenue bonds, issued for St. Luke's, to speculative grade BB-plus from investment grade BBB-minus, citing recent operating performance below expectations and, more specifically, the hospital's deterioration of unrestricted reserves.

Suzie Desai, senior director and sector lead at S&P, said "the CreditWatch positive is a reflection of Aspirus' credit strength" as opposed to any material improvement in St. Luke's financial standing. 

S&P rates Aspirus AA-minus with a negative outlook. In an April 5 disclosure bulletin, S&P said the new affiliation increased Aspirus' total long-term debt by 35% and raised its revenue by 27%. 

"With resolution of the St. Luke's CreditWatch listing and a review of Aspirus, we expect ratings for both organizations to be identical given the parity security for all debt issued by both Aspirus and St. Luke's effective March 1," the rating agency said in the bulletin, noting that it plans to meet with Aspirus' management team to discuss the impact of the affiliation and gauge Aspirus' updated financial performance.

Moody's Ratings assigns Aspirus a rating of A1, outlook stable. 

A spokesperson for St. Luke's did not respond to emails or phone calls requesting comment. Aspirus did not respond to a request for comment.

As the sole corporate member of St. Luke's, Aspirus, which now has 19 hospitals, gains reserve powers over St. Luke's operations, including future budgets and debt issuances, S&P noted in its April 5 report.

As one condition of the affiliation, St. Luke's master trust indenture was replaced by Aspirus' supplemental master trust indenture No. 3, making St. Luke's rated long-term debt a joint obligation of the Aspirus obligated group of which St. Luke's is now a part. The debt is now secured by the revenue of the obligated group and on parity with Aspirus' debt obligations under its master trust indenture.

A notice posted on Wausau, Wisconsin-based Aspirus' website said the new affiliation has been in the works since July 2023, and that both organizations took part in a public forum about their merger led by Minnesota Attorney General Keith Ellison. The combination had come under close scrutiny by the attorney general, Becker's Hospital Review reported.