Joseph Krist

Publisher

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ISSUE OF THE WEEK

CommonSpirit Health is the entity which resulted from the merger of Dignity Health and Catholic Health Initiatives. It is now coming to market with four bond issues totaling $5.8 billion of combined principal. The new ratings on CommonSpirit are BBB+. This reflects actions by S&P Global Ratings which lowered its long-term rating and underlying rating (SPUR) to ‘BBB+’ from ‘A’ on all debt issued for Dignity Health, Calif. The existing BBB+ rating on debt for CHI was maintained but the positive outlook was removed.

The plan of finance submitted is expected by management to provide $6.3 billion of bond proceeds (including net premium), the majority of which will be used for current refundings and advanced refundings of multiple series of bonds issued on behalf of Dignity Health and CHI. The advance refundings will be financed through the $2.7 billion taxable bond portion of the issuance. A portion of CHI’s CP program will also be refinanced, although the program will remain outstanding for potential future use. Approximately $600 million of net new debt is included in the $6.3 billion, and CommonSpirit intends to use these funds for reimbursement of prior capital expenditures; the funds are available to support future capital investments.

The rating incorporates what we call integration risk. S&P refers to this process as “growing pains”. The outlook assumes that no new net debt will be issued at least through the first year of consolidated operations.  We view the merged entity as symbolic of where health credits will be continually pressured to grow and consolidate. The availability of a large and sound balance sheet has been an effective tool for hospital managements to deal with the vagaries of healthcare funding. It also position these institutions to more effectively manage their reimbursement relationships with private insurers.

Nonetheless, CommonSpirit’s ratings will continue to be weighed down by the substantial debt burden which has historically been a significant negative drag on the CHI credit. it will take time to reduce the burden and provide a base for ratings improvement

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LAS VEGAS MONORAIL

This is one of those credits which keeps rising from the grave. The project went bankrupt in 2010. Now the Monorail Co is pursuing financing for an extension to serve two additional hotels on the Strip. The Monorail Co. has also approached Nevada Gov. Steve Sisolak’s office “regarding a substantial new bond financing proposal,” according to a Monorail spokesman. The Monorail Co. has repeatedly delayed the start of construction on its planned extension to Mandalay Bay. Securing new bonds to finance the project have proven difficult for a system that went bankrupt in 2010 after ticket sales fell well below official projections.

The Monorail Co. is still working to secure an additional $172 to extend its mile track on the Strip’s east side to Mandalay Bay and to the MGM Sphere at the Venetian arena project. Budget documents showed the system was expected to make about $6.5 million less in ticket sales in 2017 and 2018 than was forecast in a Monorail Co.-commissioned ridership study published in April 2016. 

Earlier this year the Monorail Co. president asked the Clark County Commission to guarantee up to $135 million of hotel room tax revenue over 30 years if the monorail needed it to help pay for the extensions. The commission has yet to make a decision on the request. Monorail backers just continue to fail to see the reality that like so any other public transit facilities, fares are never enough to pay the costs including capital costs of these projects.

PHILADELPHIA

Over the last several years, cities like Detroit with its bankruptcy and Chicago with its well documented pension problems have dominated the attention of observers of city finances. That focus has allowed the City of Philadelphia to effectively fly under the radar as it deals with issues of economic development homelessness, its education system, and public transportation. When investors were trying to decide which cities might be candidates for bankruptcy in the middle of the decade, Philadelphia was often mentioned among likely candidates.

Now Philadelphia has begun to distance itself from the likes of Detroit and Chicago. It plans to soon issue $356 million General Obligation bonds. In connection with that sale, Moody’s has announced that it maintains its A2 rating on the City of Philadelphia’s parity General Obligation debt as well as an A2 rating on its outstanding service fee and lease revenue bonds (non-pension related). It also maintained an A3 rating on the city’s pension obligation bonds.

The outlook is stable for all rated securities. The outlook is stable given the city’s materially improved financial position at fiscal year 2018 end, projections that show relative financial stability over the next five years, and permanent funding for Philadelphia schools that largely eliminates its previously projected deficits. The stable outlook also reflects continued positive trends in the city’s economy, contributing to its improved financial health, consistently conservative budgeting and Moody’s expectation of continued positive budget to actual variance going forward.

Moody’s said that the A2 rating reflects the city’s large and diverse tax base and its position as a regional hub for the mid-Atlantic US. It also incorporates other tax base strengths not captured in traditional metrics, such as a significant “eds & meds” presence that serves as a considerable tax base anchor, offset by some persistent weaknesses, like the city’s very high poverty and above average unemployment rate. The city also continues to face a moderately high debt and pension burden.

The comment did reflect some concerns not particular to Philadelphia but reflective of the Detroit and Puerto Rico bankruptcies. “The city’s pension obligation bonds are rated A3, one notch below the city’s GO and other service fee debt, to reflect a higher loss given default risk given relative performance of pension obligation bonds relative to other debt in Chapter 9 bankruptcy scenarios.” So there it is. The relative treatment of pensioners versus creditors now begins to creep into the market. Absent clearer legal guidance, the initial effect will be seen through the ratings process rather than through rush to the courthouse by weaker credits.

ANOTHER NEW HOSPITAL CREDIT

Nuvance Health is an integrated health system based in Eastern New York and Western Connecticut. The system operates seven hospital campuses: Vassar Brothers Hospital, Putnam Hospital, Northern Dutchess, Danbury Hospital, New Milford Hospital, Norwalk Hospital and Sharon Hospital. The system is looking to issue debt for the first time as a combined entity following  the April 1, 2019 merger of Health Quest (HQ) Systems and Western Connecticut Health Network (WCHN). The combined stem includes two tertiary care facilities and further supported by several community hospitals along the Mid-Hudson Valley and Western Connecticut region. 

The new credit comes to market with a Moody’s A3 rating. According to Moody’s, “the rating favorably anticipates realization of modest net synergies and efficiencies from the proposed centralized operating model. That said, execution risk will be high given the new merger, provider fee variability in Connecticut, a large presence of a unionized workforce at both legacy systems and the current and unexpected downturn in performance at HQ due to weaker volumes and physician turnover. It also cited its view that  cash will decline over the next three years as the system funds the equity component of a new patient tower at HQ’s Vassar Brothers Medical Center this year (set to open, as planned, in 2020). Other large capital projects are planned at both the NY and CT hospitals which will require the use of cash and proceeds from the upcoming financing, including construction of a new medical school.

With all of that, a negative outlook was assigned to the rating. The negative outlook reflects Moody’s view that Nuvance Health will face near term challenges to achieve and sustain stronger operating performance to support high leverage while liquidity will decline given a higher capital plan over the near term. Inability to achieve projected improvement or declines in liquidity beyond expectations will pressure the rating.

PUERTO RICO

The situation in Puerto Rico continues to grow and evolve. The move this weekend by Governor Rosello to hold on to his potion smacked of desperation. He will not run for re-election in 2020 and he resigned as president of his New Progressive Party (NPP). The fact that key positions in the succession chain are vacant only adds to the instability and uncertainty. The opposition to the Governor will focus on street protests and the legislature. More than 200,000 people have signed a petition on Change.org demanding that Puerto Rico Gov. Ricardo Rosselló resign for his “incompetence and lack of maturity to govern and for continuous corruption charges at the highest levels of his cabinet.”

Pressure will shift to the Legislature to consider impeachment if the Governor chooses to stand and fight. As for creditors, none of this helps. There was already significant mistrust among the parties and the pending decisions in  the Commonwealth’s Title III proceedings will be harder to implement given the existing executive branch vacancies. The Secretary of State, the executive director of the Fiscal Agency and Financial Advisory Authority as well as interim director of the Office of Management and Budget (OMB) and the government’s chief financial  and investment officers—resigned from their positions.

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