DALLAS — Standard & Poor's downgraded University of Arizona Health Network's revenue bond debt to BBB from BBB-plus and retained a negative outlook as the Tucson-based healthcare provider prepares to merge with Banner Health.
The one-notch downgrade and negative outlook follow similar action by Moody's Investors Service in July. Moody's lowered the UA system to Baa2 from Baa1.
Standard & Poor's analyst Geraldine Poon cited the medical system's deteriorating financial performance and weak coverage on its $336 million of debt.
"The negative outlook reflects our view of the risk associated with the severity of the operating losses and the relatively weak balance sheet, which could result in another lowered rating," Poon wrote in her Sept. 23 report.
Although Banner Health and UAHN have announced plans to reach an agreement on combining their systems into the largest employer in Arizona by the end of the year, analysts retain some uncertainty whether the deal will come about.
"If the acquisition goes through, management indicates that UAHN's rated debt will likely be defeased," Poon wrote. "If the acquisition does not take place, we view considerable credit rating risk associated with UAHN's financial profile, including a relatively weak balance sheet and recent operating losses."
UAHN was known as UA Healthcare until Sept. 2, 2011. University Medical Center changed its name to the University of Arizona Medical Center-University Campus.
The system debt is secured by a gross revenue pledge of UMCC and a fully funded debt service reserve fund, Poon noted.
"A lower rating is possible in the next year if operating losses are not stemmed and if the balance sheet does not improve incrementally," Poon said. "At this time, there is little likelihood of a higher rating. A return to a stable outlook is predicated upon considerable improvement in operating performance."
