The massive not-for-profit system CommonSpirit Health is going to be late filing its first annual financial statement following its creation earlier this year, a development that didn't come as a surprise to analysts watching along.
Leaders of the Chicago-based system, formed through the merger of Catholic Health Initiatives and Dignity Health, have had their work cut out for them since well before the deal became official on Feb. 1.
CommonSpirit said in a regulatory filing that it plans to post its results for fiscal 2019, which ended June 30, on or before Oct. 15. The health system said in a separate statement it is committed to fiscal transparency.
"The financials are being released a week later than normal due to a number of factors, including the size and complexity of the affiliation and the fact that the organization qualified for acquisition accounting, which required an opening balance-sheet audit along with the (June 30) audit," a CommonSpirit spokesperson said.
It would be one thing if it were a six-month delay, but just a few weeks after a health system would typically file its year-end results is not concerning, Kevin Holloran, a senior director with Fitch Ratings, wrote in an email. That's especially true following a big merger when there's a lot to go over, he said.
Similarly, Kenneth Gacka, a senior director and analytical manager in S&P Global Ratings' not-for-profit healthcare division, said it's not unexpected to see a delayed release with everything that has to come together in the first year.
"It doesn't strike me as a major deal that it's taking long to get through that," he said, "with the accounting nuances of acquisition financing."
The first credit risk S&P listed in its inaugural CommonSpirit bond rating is the gargantuan task of integrating the operations of two very large systems, including technology, policies, procedures, clinical quality metrics and supply chain. There are also the managerial challenges inherent to any big merger, including meshing the cultures and operating mindsets of two large organizations.
S&P rated CommonSpirit's bonds BBB+ with a stable outlook, which the ratings agency said reflects the heightened risk the system faces during its initial integration. That represented a downgrade for Dignity, which had previously been rated A. In the July report, S&P wrote CommonSpirit's performance will likely decline initially, before ultimately improving.
S&P noted that despite CommonSpirit's broad geographic and financial dispersion, with 142 hospitals and 700 clinical sites across 21 states, it still suffers from underperforming assets in key markets. That includes CHI's remaining Louisville, Ky., operations, which continue to lose money, and its Texas market, which includes Baylor St. Luke's Medical Center, part of a joint venture with the Baylor College of Medicine. In addition to that hospital losing its CMS certification for heart transplants, it's due for a replacement project that could cost up to $1 billion.
CommonSpirit expects to generate $6.3 billion in capital from its 2019 bond issuance, most of which will be used to refinance existing debt, according to S&P. Both legacy systems had avoided the public debt markets in the more than two years leading up to the merger, and CommonSpirit announced in April it planned to restructure or refinance some of its roughly $13.7 billion in outstanding debt as it moves to merge into a single credit group.
