DALLAS – Delivering its fourth downgrade to Catholic Health Initiatives in as many years, Standard & Poor's on Wednesday lowered the healthcare giant to A-minus from A, citing continued losses and "weak" maximum annual debt service coverage.
The downgrade affects about $8.3 billion of bonds issued through a variety of conduit issuers for the nation's second-largest nonprofit healthcare provider.
Moody's Investors Service still has a negative outlook on CHI's Aa2 rating after a January 2015 downgrade.
S&P's previous downgrade came in December 2014.
"Contrary to our expectations at the time of our last review for significantly improved operations beginning in fiscal 2015, CHI's operating performance was only slightly better than fiscal 2014's and has remained weak during the first half of fiscal 2016," S&P analyst Martin Arrick wrote.
"There was a meaningful drop in unrestricted cash and investments as of Dec. 31, 2015, to levels that are only adequate for the revised rating as they are well below comparable medians," he wrote.
In many regions the nature of competition is changing, putting pressure on CHI's regional systems, as has the system's rapid growth over the past five years, Arrick said. The system has nearly doubled in size over that period, with major acquisitions in the Houston market.
CHI has a turnaround plan that includes raising about $600 million from selling some of the system's administrative buildings and a major effort to reduce overhead. Other facets of the plan include tighter control of supply and labor costs, and a range of physician integration and efficiency issues, Arrick wrote.
"Some issues appear to be temporary tactical issues, such as the contract termination and successful negotiation of a new contract with Blue Cross in Nebraska, while others, such as KentuckyOne's improving performance are positive, but are simply taking longer than initially expected to achieve management's targeted goals," he said.
One concern S&P highlighted is CHI's reassessment of its provider sponsored health plan finances and goals. The system is undertaking a rapid 60-90 day reassessment of the strategy and expects to produce and implement a rapid improvement plan to rectify losses in this business line.
"In addition, the reassessment could potentially result in a decision to slow down or even stop some of CHI's movement into the insurance space, which in our view could be initially favorable as a loss avoidance strategy, yet limiting over the longer term, as more value orientation and risk acceptance become broader industry norms," Arrick said.
CHI operates in 18 states. The system includes 99 acute-care hospitals with four academic medical centers and 30 critical care facilities, along with other health-related facilities.
One of CHI's hospitals in its home state of Colorado – Longmont United Hospital – took a separate downgrade to BBB-plus based on S&P's rating methodology.
Systemwide, a return to a stable outlook would be premised on "clear indications that the turnaround plan is working and MADS coverage shows improvement to at least 1.8x and the expected improvement in the balance sheet is sustained," Arrick said.
"While an upgrade is not expected given the sizable operating loss and very weak coverage of MADS, we believe CHI's enterprise profile could support a much higher rating over time if financial performance returns to levels commensurate with higher-rated health systems," he added.