Fitch Ratings assigned CommonSpirit Health a "BBB+" rating, while Moody's Investors Service assigned it a similar Baa1 rating, both looking at about $5.7 billion of 2019 bonds.
Chicago-based not-for-profit health system CommonSpirit, the result of the combination of Catholic Health Initiatives (BBB+) and Dignity Health (A-), earned a stable outlook from both rating agencies. Although CommonSpirit is highly leveraged given its outstanding debt compared to its cash flow and thin operating margins, Fitch valued its substantial size, diversity and the scale of the sprawling $29 billion health system.
"CommonSpirit has additional credit strength beyond the face value numbers to support achievement of its goals," the ratings agency said, cautioning though that its high debt load and the need to respond to the headwinds in different markets will pressure the system's balance sheet. Over the long term, it should be able to "leverage its better-performing assets to find a balance between profitability and supporting its mission," Fitch said.
The rating aligned with CommonSpirit's expectations, the organization said in a statement, citing its "very strong" enterprise profile, broad geographic dispersion, comprehensive improvement plan, strong management team and a positive overall outlook. CommonSpirit has created a single credit group while simultaneously restructuring and refinancing about $5.6 billion in debt from its two founding organizations, which positions it well, the company said.
CommonSpirit had around $13.7 billion in outstanding debt as of the third quarter of fiscal 2019, when it reported a $100 million operating loss and a modest decline in revenue. Days cash on hand was at 146 in the third quarter 2019, slightly below its goal of 150. Cash-to-debt slipped to 81%.
Fitch expects that it will be three to five years before the system fully realizes the projected $2 billion of synergies and establishes a profitable foundation. Nearly $1 billion is expected from merger-related savings from reducing redundancies, particularly in support functions, and other efforts such as standardization, consolidating vendors and renegotiating administrative contracts. The remaining billion dollars is anticipated to stem from traditional operating improvement efforts such as reducing length of stay, labor productivity and leveraging best practices, Fitch said.
Although executives project lofty savings from the highly touted merits of scale, economists have found that hospital mergers do not often reach expectations.
Moody's noted that the system's two-CEO structure "is atypical and could be cumbersome, potentially (a)ffecting the rate of organizational and cultural change. Governance and execution risk—on a standalone basis, as well as pro-forma for the combination—constrain the Baa1 ratings."
Also standing in the way of those synergies are the continued rise of governmental payers and inpatient admissions erosion as CommonSpirit is able to squeeze less from commercial insurers. Outpatient growth did not outpace the decline in inpatient admissions through the first nine months of fiscal 2019, which began July 1, 2018. Also, the system's electronic medical records are on three different legacy platforms and CommonSpirit does not currently have a plan to convert to one system. The organization is focusing on maximizing interoperability and enhancing data analytic outputs using primarily Cerner and Epic, Fitch said.
While CommonSpirit has a leading or near leading market share in many of its key markets, most of them feature strong regional competitors that tend to draw patients and physicians, the agency said. CommonSpirit has to adapt and adjust quickly, it said.
If there are any major financial or economic disruptions over the next several years, CommonSpirit has a limited balance sheet cushion, Fitch said.
Approximately $600 million in proceeds from the debt refinancing will be used to reimburse CommonSpirit for prior capital expenditures with the remaining proceeds used to refinance a portion of the commercial paper program (approximately $314 million), refund various outstanding debt previously issued by Dignity Health and CHI ($5.2 billion), and pay costs of issuance, according to Fitch.