Newly minted Advocate-Atrium union sets stage for look at debt structure

The newly merged Advocate Aurora Health and Atrium Health will review their debt structures after completing a union that creates the nation's fifth largest not-for-profit health care system.

The two announced plans to merge in May and after clearing state and federal regulatory hurdles finalized the marriage Friday. The merged system expects to treat six million patients annually making it the fifth largest not-for-profit system in the country, with 67 hospitals in Illinois, Wisconsin, North Carolina, South Carolina, Georgia and Alabama generating more than $27 billion revenues annually.

The system is now known as Advocate Health and is headquartered in Charlotte, North Carolina. Atrium's Eugene Woods and Advocate's leader Jim Skogsbergh will serve as co-chief executive officers until Skogsbergh's retirement in 18 months, when Woods take the helm.

The brands of Illinois-based Advocate Health Care, North Carolina-based Atrium Health, and Wisconsin-based Aurora Health Care will remain intact with Wake Forest University School of Medicine serving as the academic core of the combined entity. 

"Advocate Aurora and Atrium continue to own their respective assets," reads an investor notice published on the Municipal Securities Rulemaking Board's EMMA website Friday. "Neither Advocate Aurora nor Atrium has agreed to assume any liability for or otherwise guarantee the other party's debt as part of the combination."

Both are behemoths in their regions and carry ratings in the double-A category. Atrium has about $4 billion of long-term debt outstanding and Advocate Aurora has about $3.55 billion. Advocate brings $14 billion in revenues and 27 hospitals to the table and Atrium brings $13 billion and 40 hospitals.

The parties "will evaluate the existing debt structures of the organizations, with a goal of combining credits where reasonably possible, if Advocate Health concludes that such restructuring could benefit the combined organization," the notice reads. "Any such restructuring, which may or may not include any refinancing of existing debt, will be dependent on market conditions, management considerations and other factors."

Advocate Aurora was created through a merger of Illinois-based Advocate and Wisconsin-based Aurora in 2018.

The board of each system previously had signed off on the merger but state and federal scrutiny followed, including heightened anti-trust review that the Biden administration announced last year across the sector.  

The Illinois board that has authority over mergers and new hospital construction initially put off approval in September, but signed off last month after receiving additional information. The North Carolina attorney general signed off last week, marking the final regulatory hurdle.

Advocate carries ratings of AA from Fitch Ratings and S&P Global Ratings and is rated Aa3 by Moody's Investor Service. Atrium carries an Aa3 from Moody's and AA-minus from S&P.

S&P in May issued a brief comment on the proposed deal saying, "while we cannot yet assess what a combined credit profile might look like from a ratings perspective, we do recognize that both companies maintain very solid business positions in their respective markets and are financially very sound."

Atrium Health's credit profile is "supported by several key strengths including its large absolute size with significant operations in several markets, strong balance sheet measures, and long track record of good operating performance," Moody's said in a January report.

Moody's affirmed Advocate Aurora's rating and positive outlook in August, citing strong market positions, broad business lines and strong financial discipline.

Both have been growing through mergers or strategic partnerships. Carolinas HealthCare System rebranded as Atrium Health in 2018, kicking off an expansion that led to a merger with Georgia-based Navicent Health. Atrium merged with Winston-Salem-based Wake Forest Baptist Health in 2020 and last year acquired Rome, Georgia-based Floyd Health System. Atrium Health is the d/b/a name for Charlotte-Mecklenburg Hospital Authority.

Advocate and Aurora were the largest systems in their respective states when they merged in 2018. Leaders laid out goals early in 2020 to cut costs and double revenues by 2025 with their eye on further acquisitions or mergers.

The COVID-19 pandemic might have sidelined some deals or prompted some providers to consider alternatives, such as strategic partnerships for specific services, but the Advocate Atrium proposal signals that consolidation remains on management's minds. Systems are looking to capitalize on size to manage rising expense pressures from issues, including nursing and other labor shortages and supply chain struggles.

Ponder & Co.'s quarterly review, published in October, reported 10 merger and acquisition transactions in the combined for-profit and not-for-profit healthcare sectors in the third quarter, down from 12 in the second quarter and in Q3 of 2021.

Ponder attributed the slump to the residual effects of the pandemic in terms of lag in volume rebound for certain services, labor shortages and contract labor, inflation pressures on expenses, buyer delays in acquisition decisions due to challenging results, and a high degree of regulatory scrutiny.

"Ultimately, health systems need to generate additional revenue growth to withstand cost increases and coming reimbursement pressures and must also fortify their regional relevance. Therefore, despite the headwinds outlined, M&A and strategic options will be a key consideration for virtually all health systems for the remainder of 2022 and into 2023," Ponder said.