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January 18, 2016 Briefing

UMass Memorial returns to investment grade at perfect time

Dr. Eric Dickson, CEO and president, UMass Memorial Health Care

UMass Memorial Health Care has been returned to an investment-grade status weeks before seeking $177 million in financing for future projects and refinancing of existing debt. The timing couldn't be more perfect as it dovetails with a financial environment that continues to be strong for borrowers, said Sergio Melgar, chief financial officer for UMass Memorial.

Ratings open up the field

UMass Memorial has received upgraded ratings of A- from Fitch Ratings, Ba1 from Moody's Investors Service and BBB+ from Standard & Poor's. These ratings are designed to give a simple system of gradation that allows potential investors to gauge the ability of an organization to meet its financial obligations. Simply put, the better the rating, the more attractive an organization is to investors, allowing an organization to get a more competitive interest rate.

That is exactly the impact that Melgar sees for UMass Memorial when it goes to raise $177 million to pay for facility upgrades and refinance existing debt through issuing tax-free bonds. The exact interest rate will be determined by the market on the day that UMass puts bonds out for investors, but the higher the credit rating means more people want to invest in the company, because the debt is deemed to be that much more secure. It then becomes a matter of supply and demand, yielding UMass a better price than it would have received without the improved ratings.

The importance of investment grade

While the ratings from Fitch and S&P place the organization at the middle level of investment-grade status, the major goal was to get the system up and out of non-investment grade before financing future debt, Melgar said.

While it was under junk status, the organization still did not have liquidity problems as it could always go to a bank, Melgar said, but in order to get access to organizations willing to invest in bonds, it needed investment status. Investors draw a hard line at investment grade.

“The market for the people buying the bonds just went up, and the bigger market should then get us a better deal,” Melgar said. “If there are a lot of people interested in our bonds, then that will drive the price (of borrowing) lower.”

An optimal market

While these ratings open up a slew of potential investors, the true determination of the final interest rate the organization can secure will be determined by the bond market. While this fluctuates day to day, Melgar said, low interest rates combined with concerns in the stock market could mean excellent rates.

“Our timing couldn't be better irrespective of our rating,” he said.

UMass is not done improving, and with those improvements will come better rating scores, Melgar said. Much of it comes down to fundamental performance, and with UMass continuing to exceed its financial targets and working to retain its hold on the health market in, better ratings may be in the cards.

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