Orlando Health
Orlando Health priced $853 million of tax-exempt bonds this week to fund recent acquisitions and its future capital program. The deal has a seperate taxable component.
The tax-exempt Series 2025A priced Wednesday. Deal plans also include up to $400 million of taxable Series 2025B, carrying a corporate CUSIP.
Ahead of the deal, S&P lowered the outlook on its A-plus rating for the system to stable from positive, citing Orlando Health’s recent acquisitions of three facilities in Florida and purchase of 80% ownership of five facilities around Birmingham, Alabama.
“The outlook revision reflects Orlando Health’s recent sizeable acquisitions that are somewhat dilutive to operations and key balance sheet metrics, coupled with heightened integration risk over the near term,” S&P analyst Stephen Infranco wrote in a Jan. 6 statement.
“Although liquidity and financial flexibility have decreased because of these transactions, we expect they can be absorbed at the current rating based on continued healthy cash flow, albeit below historical levels, and management’s track record of execution,” S&P said in the statement.
Fitch Ratings rates the bonds AA-minus with a stable outlook.
The Series 2025A will have a final maturity of October 2056 and the taxable Series 2025B will have a single maturity in October 2035.
“Given the use of proceeds and Orlando Health’s prior use of corporate taxable debt, we expect the Series 2025B corporate taxable index eligible bullet paired with the Series 2025A tax-exempt bonds will open up the broadest possible investor base for Orlando Health’s composite offering,” John Miller, senior vice president of finance, told The Bond Buyer.
Morgan Stanley was book-running underwriter and JP Morgan Securities co-senior manager.
The tax-exempt paper priced to yield between 3.76% for the 2038 maturity with a 5% coupon to 4.75% for the 2056 maturity with a 4.5% coupon, according to a pricing wire posted on LSEG’s Refinitiv TM3
The Orange County Facilities Authority, based in Florida, is the conduit issuer of the tax-exempt bonds and Orlando Health Obligated Group is the borrower. Orlando Health Obligated Group is directly issuing the taxable Series 2025B bonds.
Orlando Health is using the proceeds of both bonds
In October Orlando Health purchased Tenet Healthcare Corp.’s 70% majority interest in Brookwood Baptist Health in Birmingham for $835 million. With the acquisition of additional 10% interest from Baptist Health System, Orlando Health owns 80% of BBH.
“The acquisition provides Orlando Health with increased scale and geographic diversity, but its location in the competitive Birmingham service area outside the organization’s core Florida market adds heighted execution risk, at least in the near term,” S&P said.
In the same month Orlando Health purchased three hospitals from the bankrupt for-profit
“This is a market that Orlando Health has long desired to be in. Until now we’ve had higher and different capital priorities,” R. Erick Hawkins, chief administrative officer of Orlando Health, said in an online investor presentation.
“These hospitals provide a natural extension of Orlando Health’s service area and should benefit from management’s experience competing in the central Florida market,” S&P said.
“We are fortunate this opportunity came around,” Hawkins said.
In the next two years, “there will be more mergers and acquisitions in the healthcare sector,” said John Hallacy, president of John Hallacy Consulting LLC.
The possibility of
S&P said its A-plus rating reflects multiple years of very strong operations and cash flow, contributing to solid coverage of pro forma maximum annual debt service, and sufficient balance sheet metrics after the recent acquisitions.
While both the ratio of unrestricted reserves to debt and the number of days cash on hand are low and expected to remain low for the ratings for the next two years, S&P expects them to improve steadily in the years beyond that.
As positives S&P also cited “continued success in medical staff expansion and integration, execution of management’s strategic initiatives, and solid demographics in Orlando Health’s generally high-growth service areas, particularly in Florida.” Orlando Health is “benefitting from increasing net special funding, including growing Medicaid directed payment program funds.”
Along with the integration risk and comparatively weak pro forma balance-sheet metrics, for weaknesses S&P cited Orlando Health’s sizable capital spending plan in the next few years and the challenges of operating in a competitive market.
While Orlando Health has
The number of emergency visits to Orlando Health went up 26% in fiscal year 2024 from the number in fiscal year 2022 and the number of outpatient surgeries increased 16% in the same period. The organization’s earnings before interest, depreciation and amortization margin was 14.64% in fiscal 2024, compared to the 7.20% median for A-plus rated health care system, S&P said. Its average age of plant was 10 years compared to a 12.3-year median for A-plus rated health care systems.
According to Fitch, Orlando Health’s “capital spending plans remain healthy, with approximately $1 billion on average planned in each of the next five years. Fitch views this level of spending as aggressive with a more likely scenario being that spending will be realized at a slightly slower pace, which would only improve liquidity levels over the near term and create additional spending flexibility for Orlando Health.”
Including the bond sale, Orlando Health will have about $4.2 billion in long-term debt.
In a presentation to potential bond investors, Miller said the “Central Florida” region around Orlando would continue to drive Orlando Health’s performance. However, the organization believes Birmingham is a city on the rise.
He said Orlando Health has a history of success with acquisitions.
Garland Buchanan, senior research analyst at Legal & General Investment Management America, asked what percent of operating profit cash flow came from the federal directed payment program and whether the Orlando Health was confident the program would continue under Trump.
Miller said the program probably accounted for 15% to 20% of the organization’s net operating income. These programs are active in 35 to 37 states and the federal government would have a hard time getting rid of them without providing an alternative. If they were to disappear the organization would look for ways to cut expenses and increase revenues.
Orlando Health CFO Bernadette Spong said the organization doesn’t budget for the program or the Low Income Pool of federal and state funding for care for poor people, because they can be taken away.
David Pina, municipal credit analyst at Vanguard, asked about the danger of the federal government withdrawing the 340B drug pricing program, in which manufacturers who participate in Medicaid provide outpatient drugs at reduced prices. Miller said his organization gets $150 million of savings from it each year. Spong said there’s been talk of eliminating this program for 20 years and so she wasn’t worried about it.
Spong said the organization works to keep its financial metric at levels that S&P and Fitch will maintain the current ratings.
Kaufman, Hall & Associates is the municipal advisor on the deal. Chapman and Cutler is the bond counsel.
Although the hospitals are in two states, selling the bonds in one deal will save bond counsel and other fees, Orlando Health Senior Vice President John Miller said.
Orlando Health has 55 hospitals and emergency facilities, 10 specialty institutes, 115 outpatient centers, 25 medical pavilions, 17 urgent care centers, more than 5200 physicians, and $11.5 billion in assets under management.
The bonds grant a security interest in the accounts and revenues of Orlando Health Obligated Group. The obligated group consists of 13 of Orlando Health’s hospitals and most of the system’s assets and revenues. There is no debt service reserve or mortgage pledge.