Banner strives to improve U-Arizona performance

Phoenix-based Banner Health issued new bonds last week to refinance older debt, including the short-term loans it used to fund two recent acquisitions.

The 28-hospital system acquired the Tucson-based University of Arizona Health Network in a $1 billion deal in February. It also bought 44-bed Payson (Ariz.) Regional Medical Center from Community Health Systems in July.

The system is issuing $100 million in tax-exempt, fixed-rate Series 2015A bonds that close on Nov. 5. Pricing information was not available at deadline. That tranche will be used for a partial advance refunding of its Series 2007A bonds. It’s also planning to take on an additional $500 million in taxable and tax-exempt debt that will be used to replace the short-term loans associated with its recent deals.

Banner financed the UAHN transaction with a $700 million short-term loan from investment bank Mizuho, and it financed the Payson takeover with a $60 million line of credit from Bank of America. It also spent $93 million, financed with a 2014 bond offering, to open Banner Fort Collins (Colo.) Medical Center in April.

Banner is focusing on how to improve the return on its UAHN investment, which has dragged down its own earnings. UAHN’s financial performance deteriorated between the time the academic center entered discussions with Banner and when the deal closed. “We planned for this,” Banner Chief Financial Officer Dennis Dahlen said during an investor call. “We knew that acquisition would be dilutive in its initial years.”

Banner has implemented a leadership incentive plan at UAHN, including scorecards to track progress and labor productivity tools. It also hired consulting firm Sullivan Cotter to design a new physician practice compensation structure. Dahlen said Banner believes UAHN’s profitability will return in 2017.