Standard & Poor's Ratings Services said it lowered its long-term and underlying ratings to A from A-plus on debt issued by and on behalf of Catholic Health Initiatives (CHI), Colo.
The outlook on all long-term ratings is negative.
Standard & Poor's affirmed the existing A-1 short-term ratings, including the commercial paper rating and the short-term component of dual ratings backed by CHI's self-liquidity or bank liquidity facilities. About $7 billion of debt are affected.
"The downgrade is due to a large and unexpected operating loss, leading to maximum annual debt service coverage of just 1.4x in fiscal 2014," said Standard & Poor's credit analyst Liz Sweeney.
CHI's operating performance worsened considerably in fiscal 2014, contrary to expectations of an improvement. Management attributes the large $641 million operating loss (as measured by Standard & Poor's, which differs from CHI's calculations), to challenges in a few of its markets, particularly Kentucky, high expenses for electronic medical record rollouts, and costs of investments in capabilities for health reform, including health plan development and physician integration. Losses incurred in 2013 were attributed to similar reasons.
The rating agency expected improvement in fiscal 2014 due to integration efforts in certain markets, particularly Kentucky, Nebraska, and Texas; performance improvement initiatives; benefits of consolidation and economies of scale in certain markets; and the subsidence of the disruptive impact of electronic medical records rollouts, which hit certain markets hard in fiscal 2013. Although progress has been made in certain areas, including Texas, other areas such as Kentucky were notably worse and IT costs were well above budgeted.
