Banner Health, a Phoenix-based system with 28 hospitals, is issuing new bonds this week to refinance older debt, including the short-term loans it used to fund two recent acquisitions.
Banner acquired the Tucson-based University of Arizona Health Network in a $1 billion deal in February. It also bought 44-bed Payson (Ariz.) Regional Medical Center from Community Health Systems in July.
The system is issuing $100 million in tax-exempt, fixed rate Series 2015A bonds that are scheduled to price Tuesday and close on Nov. 5. Pricing information was not available at deadline. That tranche will be used for a partial advance refunding of its Series 2007A bonds.
It is also planning to take on an additional $500 million in taxable and tax-exempt debt that will be used to replace the short-term loans associated with its recent deals.
Banner financed the UAHN transaction with a $700 million short-term loan from investment bank Mizuho, and it financed the Payson takeover with a $60 million line of credit from Bank of America. It also spent $93 million, financed with a 2014 bond offering, to open Banner Fort Collins (Colo.) Medical Center in April.
As Banner prepares to put in place long-term financing, it is also focusing on how to improve the return on its UAHN investment, which has dragged down its own earnings results.
UAHN's financial performance deteriorated between the time when the academic medical center entered discussions with Banner and when the deal closed. Its operating margin declined to -4.3% in fiscal 2014, from -1.2% the previous fiscal year. Before that, UAHN was profitable, Banner Chief Financial Officer Dennis Dahlen said on an investor call.
“By the time we got it … we were definitely in a turnaround state of mind,” he said. But he emphasized, “We planned for this. We knew that acquisition would be dilutive in its initial years, so we're not surprised.”
In the first 200 days since the merger, Banner has implemented a leadership incentive plan, including scorecards to track progress, as well as labor productivity tools in an attempt to right the ship. It has hired 45 physicians to fill 105 openings in Tucson. And it hired consulting firm Sullivan Cotter to design a new physician practice compensation structure.
But the acquisition also broadens Banner's footprint, allowing it to reach 82% of Arizona residents and create an academic brand in the Phoenix market. Banner also plans to expand UAHN's health plans statewide.
And the system believes that it will stabilize UAHN's financial picture through the end of the next year, with profitability returning in 2017, Dahlen noted.