St. Louis-based BJC Health System hits the market this week with an $805 million transaction that aims to shed bank and rate risks associated with direct placement debt.
The system offers the bonds in three series — $315 million, $250 million, and $240 million. RBC Capital Markets is running the books with BofA Securities and JPMorgan round out the underwriting team. The Missouri Health and Educational Facilities Authority is serving as conduit for the tax-exempt issue.
The deal raises some new money to reimburse the system but most will refund direct placement, variable-rate debt.
“Our goal with this transaction is to reduce a few types of risk in the current debt portfolio,” the system’s Chief Financial Officer Nick Barto said in a recorded roadshow. The deal moves up to 66% from 22% the level of debt in a natural, fixed-rate structure and reduces bank renewal risk.
The B and C bonds are structured as put bonds with initial five- and seven-year fixed-rate terms. Market participants said the deal could add to overall interest costs but the favorable long-term, fixed rates make the timing good to reduce existing risks.
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“BJC will dramatically reduce its outstanding variable-rate bank loans with this refinancing, which we view favorably,” S&P Global Ratings said in its review.
The offering statement references COVID nearly 100 times, laying out the wounds so far the system has managed without much balance sheet impact thanks to federal help and early action.
“While many of our metrics were impacted negatively by COVID we were proud to have delivered the services that we did over the course of 2020 and feel as if we delivered the care that was needed in our community,” Barto said. “We walked away from 2020 with vary similar performance financially.”
Admissions declined by 8.5% to 131,000 as elective services were shut down in early April but the system headed into the pandemic in strong shape and business picked up after the shutdown ended. BJC closed out fiscal 2020 with a 4.9% operating margin, the same as 2019, and generated operating revenues of $5.6 billion, up $200 million. Cash on hand covered 469 days, or 433 after subtracting the one-time federal Medicare advance, up from 357 days in 2019.
The system managed to hold its balance sheet steady in part by initially “clamping down on capital spending” and through federal CARES Act support, Barto said. Other actions included furloughs, freezes on hiring and salaries and executive compensation cuts that all totaled reined in costs by $100 million.
BJC received $227 million of CARES Act stimulus funds and other grants in fiscal 2020. BJC received $478 million of Medicare advance payments but they must be repaid. BJC has about $18 million of additional stimulus funds that it will likely recognize in 2021 but have not yet been included in the budget.
Analysts recognized the system for navigating the pandemic’s effects. Moody’s Investors Service affirmed the system’s Aa2 and stable outlook and S&P Global Ratings affirmed its AA and stable outlook. The system has $1.7 billion of rated debt.
"The rating reflects our view of BJC's enterprise strengths, including a leading market share and highly regarded reputation, particularly for its academic adult and pediatric flagships in the region that are affiliated with Washington University School of Medicine," said S&P analyst Cynthia Keller.
The system is challenged by a payer mix with a high amount of Medicaid business due to its role as a safety net, but management has consistently produced stable earnings and cash flow, even during the pandemic, S&P said.
A lower rating, while not expected, could occur with a material and unexpected debt issuance or sustained operating challenges that limit BJC's cash flow and debt service coverage, S&P said.
BJC’s credit benefits its prominent reputation as a leading academic medical center and long-standing affiliation with Washington University School of Medicine, Moody’s said.
“Despite the negative effects of the pandemic, operating cash-flow margins were in line with fiscal 2019's due largely to CARES funds and management's cost-cutting actions,” Moody’s said.
BJC owns and operates 14 acute care hospitals in Missouri with a concentration in the St. Louis region and in southwest Illinois. The system is anchored by its two academic hospitals — the 1,393-staffed be Barnes-Jewish Hospital and the 349-staffed bed St. Louis Children's Hospital and 68-staffed-bed Barnes-Jewish West County Hospital with the WUSM affiliation running through 2027.
BJC’s debt portfolio includes $936 million of variable- to fixed-rate swaps with four banks. As of Dec. 31, BJC had $108 million of collateral posted, although that had declined to $64 million at Feb. 26. Considering the swaps, more than three-quarters of BJC's debt is naturally or synthetically fixed-rate, S&P said.
