St. Louis health care group upgraded before $179 issue for expansion.

CHICAGO -- BJC Health System, the product of a 1993 merger funded by $335 million of debt, has been upgraded by Standard & Poor's Corp. on the eve of a $179 million bond issue designed to help the group as it expands further into the St. Louis market.

The new revenue bond issue is scheduled to be priced tomorrow, exactly one year after Barnes-Jewish Inc. and Christian Health Services -- both not-for-profit entities -- combined forces and united their debt under one legal structure. In the ensuing year, BJC has acquired two new hospitals and moved to a leading position in the St. Louis area, according to Standard & Poor's.

The rating agency upgraded BJC's rating to AA from AA-minus Oct. 18, because the acquisitions moved the group into "a dominant market position" in St. Louis. Moody's Investors Service confirmed on Oct. 19 its existing Aa rating for the health concern.

B JC acquired Missouri Baptist Medical Center in western St. Louis in June 1994. Two months later, it acquired St. Louis Children's Hospital.

Mary Burlington, managing director at Merrill Lynch & Co., the senior manager for the system's latest bond issue, called Children's Hospital "one of the premier pediatrics facilities in the country."

Standard & Poor's said the "recent additions ... strengthen BJC's market position in the children's service niche and in the western and southern sections of the metropolitan service area."

The rating agency said St. Louis is an "overbedded market," but that BJC is "structuring itself to thrive as the dominant system as the rest of the market eventually consolidates."

Missouri Baptist has about $105 million of debt outstanding from a bond issue sold in 1989 and two series sold in 1990. Children's has $77 million of debt outstanding from an insured 1992 bond issue.

The Missouri Baptist 1990 B series bonds were sold at a variable rate and were secured by a letter of credit. The other Missouri Baptist bonds had A minus ratings.

"The purpose of this financing is to bring Missouri Baptist and Children's into BJC's consolidated master trust indenture, as well as to be able to get some savings from refinancing," Burlington said.

"Both of Missouri Baptist's 1990 issues and about a third of the Children's debt are being refinanced," she said. "The rest of the Children's debt and the 1989 Missouri Baptist issue are being defeased with equity moneys."

She said BJC is also borrowing to restore its desired cash-to-debt ratio because it will be using its own money for the equity defeasements.

The creation of B JC epitomized a national trend toward health mergers designed to build efficient networks. Burlington says the two new acquisitions prove that not-for-profit entities continue to consolidate at the same rapid pace as for-profit health care systems.

Standard & Poor's apparently concurs, writing in its analysis of the group that "the integration of several previously independent components into a larger system is progressing surprisingly well."

The bonds will be issued by the Missouri Health and Educational Facilities Authority. The two other co-senior managers for the deal are Stifel, Nicolaus & Co. and A.G. Edwards & Sons Inc.

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