Trinity-CHE 'mega merger' seen as positive for not-for-profit sector

Moody's Investors Service calls the proposed merger between Catholic healthcare giants Trinity Health and Catholic Health East credit positive for the not-for-profit hospital industry.

The proposal, announced last week, would create the second-largest not-for-profit healthcare system by net-patient income in the U.S., trailing only St. Louis-based Ascension Health. Officials hope to finalize the merger by spring.

In the company's weekly credit outlook (PDF), Moody's said the merger is typical of the industry. The firm expects to see more hospitals merge in the future: “We view consolidation as a credit positive for the industry overall as merger, acquisitions and various partnership models should create greater efficiencies and lead to reduced hospital operating costs over the long term. Consolidation is one of the positive mitigants to our negative sector outlook for the not-for-profit hospital industry,” the report read.

Before the merger's announcement, Moody's had awarded Novi, Mich.-based Trinity a long-term credit rating of Aa2, and Newtown Square, Pa.-based Catholic Health East earned an A2. The firm said that in the short term, the merger is credit positive for Catholic Health East, while credit negative for Trinity. That conclusion is “based on resulting changes to each system's financial and debt coverage metrics and the expected timing of improvements in these metrics.” The systems' previous experiences in going through mergers will be beneficial, Moody's added.

According to the systems' most recent financial statements, Trinity has $4.4 million in total debt, while Catholic Health East has $1.6 million. Trinity has a 141% cash-to-debt ratio, while Catholic Health East has a 107.8% ratio. Trinity has a 39.8% debt-to-revenue ratio, while Catholic Health East has a 36.9% ratio.

“Nonetheless, we expect material savings over the longer term as the enterprises leverage their skill and scale,” the Moody's report read.

Moody's assessment doesn't mean a ratings change, but how the proposed merger would impact the systems' overall credit profile.