The Dose

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Moody's warns Franciscan Alliance faces financial pressure, softer margins

December 18, 2017

Franciscan Alliance, one of Indiana’s largest health systems, is selling $340 million in bonds on Monday, but a major credit-rating agency is warning investors that Franciscan is facing operating challenges as it undertakes numerous capital projects in northern and western Indiana.

On Dec. 12. Moody’s Investors Service assigned a rating of Aa3 to the new bonds, which is fourth-highest in the Moody’s long-term scale. However, it downgraded the rating outlook from stable to negative, meaning that it could be lowered.

The rating agency said it expects Franciscan’s operating margins to soften, “due to a variety of cost and revenue pressures.” It projected that operating leverage will be “moderately high.”

“Further, the system will face some challenges as it consolidates sites and develops centers of excellence to address over-bedding and improve efficiencies in certain markets,” Moody’s said.

It added that its negative outlook reflects the view that Franciscan “will likely experience softer margins and somewhat higher operating leverage due to both cost and revenue pressures.”

The purpose of Moody's ratings is to provide investors with a system of grades by which the future creditworthiness of securities may be gauged, according to the agency.

Officials at Franciscan, based in Mishawaka, did not respond to IBJ’s request for a comment. The system operates 14 hospitals, including Franciscan Health on the south side of Indianapolis. It employs 616 physicians and 211 advanced practice providers.

The system plans to use the proceeds for capital projects and to refund the majority of outstanding 2009 bonds. The Moody’s rating affects $790 million of total debt.

Franciscan plans to spend an average of $327 million per year over the next two years on projects, according to Bond Buyer, an industry newspaper. The projects include a new patient tower on the Lafayette East campus, a new cancer center on the Munster campus, and a replacement hospital on the Michigan City campus.