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Debt hurts Centegra bond rating

But leading market share postion upgrades health system’s outlook

Published: Thursday, May 8, 2014 3:50 p.m. CDT • Updated: Thursday, May 8, 2014 11:33 p.m. CDT

CRYSTAL LAKE – Centegra Health System’s growing debt and modest profitability have earned it a lower bond rating but an upgraded “stable” outlook from Fitch Ratings.

Fitch Ratings gave a “BBB” rating to $134.7 million in bonds the Illinois Finance Authority plans to issue on behalf of Centegra Health System to build its 128-bed hospital in Huntley. The ratings agency also downgraded from “A-” to “BBB” $195 million in revenue bonds IFA issued on behalf of Centegra in 2012, according to a news release from Fitch this week.

But Fitch also changed Centegra’s rating outlook from “negative” to “stable.”

The agency’s top credit rating of “AAA” has the lowest expected risk of default. “BBB” ratings “indicate that expectations of default risk are currently low,” according to the agency. The rating affects the Crystal Lake-based hospital system’s borrowing costs. Lower ratings typically result in higher interest rates.

Standard & Poor’s Ratings Services also gave Centegra’s debt a “BBB” rating, the hospital system said. Centegra expected the move.

“Centegra Health System is ready to make a significant investment in the future health of the community by building Centegra Hospital-Huntley. The debt it requires is part of the process of building a new hospital, which affects our credit rating,” said David Tomlinson, executive vice president, chief financial officer and chief information officer at Centegra Health System. “Both Fitch and S&P have revised the health system’s rating to BBB with a stable outlook. This shows confidence in our strong management practices, physician growth, technological investments and the power of our plans for the future.”

Centegra had total operating revenues of $398.9 million in fiscal 2013. Its outstanding debt is expected to increase 47 percent to about $400 million from about $210.5 million now, according to Fitch Ratings.

Fitch looked favorably on Centegra’s leading market position in McHenry County. Centegra’s market share stood at 43.3 percent in March, slightly lower than the 44.8 percent share it had in fiscal 2013 and the 45.6 percent share in fiscal 2012.

By comparison, Advocate Sherman Hospital in Elgin holds 13.8 percent of the market share (up from 11.7 percent in 2012) and Advocate Good Shepherd Hospital in Barrington has about 12.7 percent market share, according to Fitch Ratings.

“With three hospitals, two fitness centers and various clinics and specialty services located throughout McHenry County, Centegra has been increasing its access points and is well positioned for managing the future delivery of care,” the report said. “Fitch views Centegra’s proactive and strategic initiatives as a credit positive and will likely prove to the success of the new hospital.”

Fitch also said it believes the Huntley hospital “could help Centegra expand its footprint in the growing southern portion of McHenry County.”

The ratings agency said that it expected Centegra to maintain or improve operating profitability in the future or that “deterioration could be cause for concern.”

Construction of the Huntley hospital started this year. It is expected to open in August 2016.

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