Mercy hospital suitor takes on additional debt
PORTLAND — The hospital network trying to acquire Mercy Health System last week doubled its long-term debt in order to finance a major expansion of its flagship hospital – but says that doesn't change the network's plans for Mercy.
On Jan. 30, Eastern Maine Healthcare Systems issued $150 million in bonds to help fund expansion of Eastern Maine Medical Center in Bangor. The expansion, described as the largest ever undertaken by EMHS, includes construction of a seven-story patient tower that will add 65 beds to the 350-bed hospital.
The sale of the bonds comes two weeks after EMHS and Mercy signed a "definitive affiliation agreement" to merge Mercy, including 230-bed Mercy Hospital in Portland, into the EMHS network.
"We have the capacity to take this on," EMHS President and Chief Executive Officer M. Michelle Hood said Tuesday. "We have a lot of talent, resources and careful, conservative management."
Mercy, a Catholic, nonprofit system, signed a letter of intent to negotiate its sale to EMHS on Dec. 7, 2012, after previous negotiations fell through with Steward Health Care System, a for-profit Massachusetts hospital chain.
While the terms of a potential deal are still being worked out under the affiliation agreement, EMHS expects to take on $73 million in debt from Mercy, according to EMHS' 2012 financial statement. EMHS would spend another $115 million to cover the cost of merging the organizations and to pay for capital improvements at Mercy over the next five years.
Those costs would be on top of the $150 million in bonds EMHS issued last week. Prior to that, EMHS had outstanding bonds and other debt totaling about $153 million at the end of September, according to its financial statement.
But Hollings said those numbers are in line with other hospitals and won't affect a deal with Mercy.
"According to Moody’s, EMHS debt levels will be on the low size even after this bond offering," Chief Financial Officer Derrick Hollings said in an email. "These ratios compare favorably to A-rated hospitals. ... We have several hundred million of debt capacity available after this offering."
Hollings admitted that an acquisition of Mercy could lead Wall Street rating agencies Moody's and Standard and Poor's to downgrade the recently issued bonds. But he said that was unlikely because the ratings – both investment-grade – were conservative and had enough "cushion" in them not to be dramatically affected.
The acquisition of Mercy was being carefully considered as EMHS put together financing plans for the expansion, he said.
"We had a very clear view of Mercy back in the fall ... that situation was percolating."
If EMHS is successful, Mercy would join a system that includes six other hospitals besides the medical center. All based in central and northern Maine, some of these outposts are as small as 25 beds. EMHS also includes physician groups, nursing homes, ambulance services and other healthcare organizations.
While Mercy is larger than most EMHS hospitals, and its acquisition would represent EMHS' first foray into southern Maine, the deal shouldn't seem surprising, according to Hood.
"I don't consider Mercy to be an outlier," she said. "We're a very large, diverse system, and Mercy and our team share a common vision about transforming and delivering health care in the state of Maine."
Hollings said a deal with Mercy would allow it to benefit from economies of scale that Mercy doesn't enjoy under its current parent organization, Catholic Health East.
"There isn't a lot of opportunity for synergy and sharing of infrastructure (under CHE)," he said. "Each member is operated like a standalone hospital."
Any potential deal would require regulatory approvals, including a certificate-of-need review by the state, federal antitrust clearance, and the approval of the Vatican. The process is expected to take another six to nine months.
Calls to Mercy officials were not returned.