ProMedica plans $1.45 billion debt offering to continue expansion

Sept. 29--ProMedica is preparing a blockbuster $1.45 billion debt offering this autumn to continue hospital and facility expansion as well as repay a bridge loan from Barclays that partially financed the purchase of HCR ManorCare earlier this year.

Assuming it goes forward, the debt offering will be the largest in ProMedica's history.

ProMedica is one of the nation's biggest integrated healthcare systems with 13 hospitals in two states, 900 physicians, a large health insurance arm and now -- following the ManorCare acquisition -- skilled nursing homes and senior-care operations in 30 states.

The biggest part of the upcoming debt offering is $1.15 billion to replace with permanent financing a one-year bridge loan owed to British investment banking giant Barclays, said ProMedica Chief Financial Officer Michael Browning.

That loan was instrumental in allowing ProMedica, along with Toledo-based Welltower, to buy HCR ManorCare for about $3.3 billion in July. ProMedica bought the operating business to diversify beyond hospital and healthcare operations into nursing homes and assisted living, while Welltower bought the buildings to lease back to ProMedica. Welltower is a real estate investment trust.

The other $300 million that ProMedica expects to raise will go toward finishing its Generations of Care Tower at ProMedica Toledo Hospital and for other building and equipment projects, Mr. Browning said. The new patient tower piece is about $170 million.

The bond markets are still offering attractive interest rates on hospital debt, said Kevin Holloran, senior director at Fitch Ratings who analyzes health-care companies.

"It's still a very healthy issuance market for health-care companies in general," Mr. Holloran said, adding that most offerings in the space garner high demand from investors trying to buy the debt for its high interest rates.

Tim Roberts, ProMedica director of corporate treasury, said that the health-care company can expect to pay an interest rate of about 5% on the debt it offers.

That is despite a four-notch downgrade in its debt rating to BBB by S&P Global Ratings in August, and a recent three-notch drop by Moody's as well.

Though the Federal Reserve has been gradually raising benchmark interest rates this year, the difference in interest rates paid for top-rated hospital debt and lower-rated issues has been minimal. ProMedica's debt is still rated investment grade, keeping interest rates relatively attractive, Mr. Roberts said.

Moody's downgraded ProMedica after its HCR ManorCare acquisition on the premise that the merger, while more than doubling annual revenue to close to $7 billion, dramatically increases company debt and slows cash generation, the rating agency said in an August report.

When the $1.45 billion in debt is issued in the fourth quarter, ProMedica's total long-term debt will jump from $972 million to about $2.3 billion.

Debt service will jump from about $50 million a year to well north of $100 million depending on the interest rates that ProMedica is able to fetch.

Mr. Browning said ProMedica will have no trouble covering the increased debt payments as it absorbs ManorCare into its system.

The merger positions ProMedica to prosper from the industry transition from fee-for-service reimbursement that pays hospitals and doctors each time they treat patients to so-called value-based reimbursement. Under that system, providers take some financial risk for treating a patient's whole illness or episode whether that care happens in a hospital, physician's office or nursing home.

HCR ManorCare was one of the nation's largest operators of skilled nursing homes, assisted-living facilities, home care and hospice.

ProMedica plans to sell taxable revenue bonds to investors to raise the $1.15 billion needed to repay Barclays, Mr. Browning said. The $300 million portion of the issuance for facilities will be raised through the sale of tax-exempt bonds, he said.

The Lucas County Board of County Commissioners set the stage for the $300 million issuance by authorizing up to $870 million in bond offerings for ProMedica for this autumn and in the future.

Contact David Barkholz at [email protected] or 419-724-6134 or on Twitter @barkholzatAN.

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