CommonSpirit plans $2 billion bond issue amid rush to borrow

Calif. bill could stifle healthcare M&A

CommonSpirit Health’s $2 billion proposed bond financing could make it the latest health system rushing to finish its financing ahead of the November presidential election and market uncertainty that surrounds such monumental events. The Chicago-based system said it plans to lock in the financing, contingent on market conditions, in the fourth quarter of 2020. Most of the transaction will be refinancing existing debt, but the package will also mean issuing new taxable and tax-exempt debt, including $750 million to fund capital projects. Many health systems are issuing new debt or refinancing now given the historically low interest rates. There’s also a rush to get those deals done before the presidential election, as such events tend to trigger market uncertainty, said Ken Gacka, senior director and analytical manager for healthcare ratings at S&P Global Ratings. “A lot of people just want to get in before all that happens,” he said. Phoenix-based Banner Health, for example, announced Friday a roughly $600 million issuance to refinance existing bonds. The CommonSpirit bond offering is the next step to build on the health system’s 2019 restructuring and refinancing, which brought the two systems that merged to form CommonSpirit under the same credit structure, the health system said in a statement.”While CommonSpirit currently has solid cash reserves, bond offerings are one important way to provide the organization with long term committed capital, which is particularly important today given the financial challenges all providers are experiencing as a result of the COVID-19 pandemic,” the system said. Given CommonSpirit’s size—142 hospitals and almost $21 billion in revenue in fiscal 2019—a $2 billion package isn’t a surprising figure, Gacka said. “All things considered, it’s not a significant increase in debt,” he said. “It’s mostly refinancing.” CommonSpirit said in the notice its plans could still change, and the announcement is not a guarantee.CommonSpirit’s total debt stood at $14.8 billion as of March 31, 2020, up from $13.5 billion as of June 30, 2019. Its debt to capitalization was 52.8% as of March 31, compared with 48.4% as of June 30, 2019. Just under 70% of the health system’s debt was comprised of traditional, fixed rate bonds as of March 31, which marked the end of the third quarter of CommonSpirit’s fiscal 2020. CommonSpirit’s finance team told analysts and investors on the system’s third quarter call in May that the system was not in danger of violating any of its debt service covenants by the end of its fiscal 2020, which was June 30. A spokesman said the health system plans to release its fiscal 2020 results soon. Dan Morissette, CommonSpirit’s chief financial officer, said on the call that the system’s leaders have weekly liquidity meetings, where they examine investment performance and adherence to debt covenants. “Barring some calamity we are not anticipating, we believe we are in compliance with all our covenants,” he said.In preparing the system’s financial statement for its fiscal 2020, leadership may decide to classify COVID-19-related expenses as extraordinary items, thereby omitting them from its debt service calculation, Jean Ham, CommonSpirit’s vice president and assistant treasurer, said on the system’s third-quarter investor call. In calculating its adherence to debt service covenants, CommonSpirit’s bond agreements allow the system to exclude extraordinary items, such as investment losses. CommonSpirit reported a $145 million operating loss in the third quarter due to a reduction in patient volume as the not-for-profit system prepared for the COVID-19 pandemic. That was just after the system had posted its first operating gain since its February 2019 merger.

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