Illinois-based Carle Foundation will offer about $600 million of double-A-minus rated paper over the next month to finance upgrades at some of its five hospitals and reimburse itself for acquisitions that helped bolster its market position.
Despite a weakening of its operating performance, the system is highlighting its continued profitability in the face of blows suffered due to the COVID-19 pandemic that forced hospitals into triage mode when elective services were temporarily shuttered last spring.
The system temporarily halted pension contributions, deferred some capital spending, and cut senior management salaries. It received about $41 million of federal CARES Act aid in 2020 but did not seek an advance on Medicare payments as allowed by the federal government with its ownership of an insurance plan continuing to perform well.
“Even without the COVID relief dollars, Carle would still have been profitable in 2020,” the system’s chief financial officer, Dennis Hesch, said during a recorded investor presentation.
Amid the pandemic, profitability was sustained with a 2.3% operating margin, Fitch Ratings said.
“Looking forward, Fitch expects Carle to continue to generate profitable operating results and sound cash flow generation,” Fitch said. Carle management has budgeted an operating margin of 1.5% this fiscal year. “Fitch believes that Carle's margins held up better compared to many other hospital operators in part because of the health plans, which provided a steady stream of revenues independent of volumes.”
The Urbana-based system that serves central Illinois on Thursday will sell a roughly $464 million fixed-rate series that matures in 2048 along with a mandatory tender bond for $38 million with the tender in 2031 and final maturity in 2053.
The system returns next month with two variable-rate demand bond series each for $50 million with Barclays providing a letter of credit on one and Northern Trust providing a standby purchase agreement on the other.
About $300 million represents new money to finance improvements at various facilities including the flagship Carle Foundation Hospital in Urbana and to finance a portion of the $187 million cost to acquire BroMenn Medical Center and Eureka Hospital from competitor Advocate Aurora Health last July. The remainder refunds outstanding debt issued in 2009 and 2011.
The system operates five hospitals and a health plan with 254,000 members in six states, generating $3 billion in annual revenues. That’s up by 87% since 2010.
Market share has risen by 62% from 48% in 2010. It also operates the Carle Illinois College of Medicine in partnership with Urbana-Champaign-based University of Illinois which it calls the world’s first engineering-based medical school.
“The acquisition now allows Carle to expand our footprint into the northwest region of our secondary service area really increasing our overall market share and the ability to increase our system referrals to the Carle Foundation,” Hesch said.
The system acquired the hospitals and a physicians’ group for a $183 million cash payment and the recognition of certain liabilities. Last April it also acquired an 80% stake in the First Carolina Care insurance plan in North Carolina for $30 million as it offered a “strategic opportunity” to expand its insurance footprint, Hesch said.
All four series are tax-exempt and selling through the Illinois Finance Authority. Barclays and Goldman Sachs are the senior managers. Ponder & Co. is advising the system.
Ahead of the sale, Fitch and S&P Global Ratings affirmed the system’s long-term AA-minus ratings and stable outlook. The system is still waiting for short-term ratings on the VRDOs selling next month. Carle has about $760 million of debt.
The rating “incorporates Carle FD's healthy financial profile, with growing unrestricted reserves and a manageable pro forma debt load, offset by a multiyear trend of declining operating margins," said S&P Global Ratings analyst Allison Bretz adding that the “financial profile is anchored by a strong balance sheet, which offers some, though not unlimited, cushion as it continues to weather the operational pressures associated with the COVID-19 pandemic.”
