WakeMed's bond analysts await more details on Rex bid

Two debt-rating analysts who follow bonds issued by WakeMed and Rex Healthcare say that they won't automatically reduce WakeMed's rating if the hospital borrows millions more to pay for its proposed $750 million purchase of Rex.

"As part of the acquisition, there will be certain economies of scale, certain efficiencies that get realized," said James LeBuhn, a Chicago-based analyst with Fitch Ratings. "We would take that into account vs. the increased debt load. There's a benefit to size and scale."

Since WakeMed announced its hostile takeover offer this month, critics have questioned whether the hospital can afford to pay that much money for Rex, plus assume Rex's $158 million in debt. UNC Health officials have said they're not interested in selling Rex, but will form a committee to consider a formal offer from WakeMed.

WakeMed executives, including Tom Oxholm, an accountant who took over as chairman this week, have said they will pay for Rex using a combination of more than $600 million in cash reserves as well as additional financing.

"That is a staggering amount of money," said Kevin Schulman, a health-care economist at Duke University. "They're not going to get rid of $750 million worth of jobs. There could be some synergy on the back end, but it will be nowhere near that amount.

"The only way they'll be able to recoup costs is through price increases," he added. "This is the most extreme example of what's driving up the cost of health care."

WakeMed already has about $450 million in debt in the form of tax-free bonds. The cost of borrowing more would increase if bond-rating agencies cut their ratings, which essentially means they believe the bonds are riskier for investors. That would force WakeMed to pay higher interest rates.

In a February report on WakeMed, Fitch's analysts wrote that "a large amount of additional debt would be viewed unfavorably."

Fitch rates WakeMed's bonds as "AA-." Rex's bonds get an "A+" rating.

Fitch cites WakeMed's strengths, including its 47 percent share of Wake County's inpatient market and its strong cardiac program. Rex benefits from its large share of outpatient surgeries, stronger margins and ownership by the UNC Health Care System.

For Rex's last fiscal year, the hospital reported about $35 million in income from operations, for a record operating margin of 5.9 percent, Fitch reported. WakeMed's operating income was $20.4 million, or a 2.1 percent margin.

By combining the two hospitals, WakeMed could reduce costs for supplies, and eliminate some redundant services, Fitch's LeBuhn said.

WakeMed CEO Bill Atkinson said the combined hospitals would be able to choose more carefully where they expand, rather than have each hospital rushing to build new facilities in every corner of Wake County. There also could be layoffs to cut costs, although this region's growing population will continue to fuel demand for more health care.

As one cost-cutting measure, WakeMed would likely scrap Rex's plans to build new hospitals in Holly Springs and North Raleigh. And WakeMed would halt Rex's proposal to build a heart center at its campus in Raleigh.

Fitch analysts said they won't take any action on their rating on WakeMed's bonds for now.

"We will definitely be getting in touch with" WakeMed officials in the next few weeks to get more information on the deal, said Michael Burger, a Fitch analyst in New York.

Analysts who follow WakeMed and Rex bonds for Moody's, another rating agency, didn't return calls seeking comment.