St. Louis-based Mercy Health system took two rating hits over its rising debt levels and strained balance sheet metrics as it readies a $354 million borrowing and looks ahead to a post-COVID-19 recovery after taking actions to tighten its belt.
Moody’s Investors Service lowered the rating one notch to A1 from Aa3 and assigned a stable outlook while S&P Global Ratings also cut the rating one notch to same level at A-plus from AA-minus and assigned a stable outlook. The system will have $1.4 billion of debt after the transaction.
"The rating action reflects our view of Mercy's light financial profile, including several years of weak and uneven operating performance, coupled with a pro-forma balance sheet that is only adequate relative to that of higher-rated medians and peers," said S&P analyst Suzie Desai.
The stable outlook reflects Mercy's good business position in its markets, management's actions to improve operating performance, and financial flexibility as relates to capital needs, S&P said.
The deal will reimburse the system for expenses that include funding a new patient tower at one hospital, a new cancer hospital at one of its St. Louis facilities, and the purchase of previously-leased properties.
BofA Securities and JPMorgan are senior managers. The bonds are expected to price net week. Ponder & Co. is advisor and Gilmore & Bell PC is bond counsel. The bonds are selling through the Missouri Health and Educational Facilities Authority.
Mercy operates more than 40 acute care, managed and specialty hospitals, 2,000 employed physicians' practices and 350 outpatient facilities in Arkansas, Kansas, Missouri and Oklahoma. The system generated $6.5 billion in revenues last year, making it the sixth largest Catholic not-for-profit health system nationally by revenues.
The system’s size and regional diversity benefit the rating as does its seasoned management team and an operating company model that enabled it to respond quickly to the pandemic’s strain, Moody’s said.
The downgrade was attributed to increased debt levels that “will weaken leverage measures that were already unfavorable for the Aa3,” Moody’s said.
Days cash on hand will improve with reimbursement proceeds and lower expenses but cash to debt will remain below average even though it’s expected to improve as the system’s liquidity growth plans gain traction.
“Solid volume recovery, extensive expense reductions and favorable progress on revenue strategies should translate into higher cash flow in 2021, as demonstrated by Mercy during the first half of 2020 prior to the shutdown,” Moody’ said.
The system lays out its pandemic strains, actions taken to soften the blow and returning volumes that lay the groundwork for it to meet fiscal 2021 goals in the offering documents. “Our near term financial goals remain consistent” for an 8% operating cash flow margin, the system reports.
The system shifted to a centralized model from a regional one to manage through the pandemic and generated $315 million in savings by reducing $125 million in retirement contributions and $190 million from position cuts. To protect liquidity, the system expanded credit lines to $425 million from $125 million, and also tapped CARES Act funding.
“As a result of these decisions we have emerged from the initial phases of the pandemic as a reshaped, leaner and more agile organization,” the system reported.
As hospitals were allowed to resume elective surgeries and procedures, patient revenues returned to 94% of pre-COVID-19 levels in June and in July patient revenues exceeded July 2019 results by 3.6%. August total revenues exceeded last year’s results by 4.5%.
