Coronavirus dampens fiscal progress of hospital chain ProMedica
The COVID-19 pandemic threatens to set back Ohio-based ProMedica Health’s efforts to bolster its balance sheet and preserve its investment grade level ratings.
Fitch Ratings last week cut the nonprofit hospital group’s rating to BBB-minus from BBB and assigned a stable outlook.
“Revised expectations have placed downward pressure on the rating and increased the significance of improving both operations and balance sheet strength in order to maintain the investment-grade rating,” Fitch said.
The rating action marked the latest in a series of downgrades over the last several years and puts the rating on par with Moody’s Investors Service, which rates ProMedica at the lowest investment grade level of Baa3.
Moody’s in October lowered the rating two notches to Baa3 from Baa1 and maintained a negative outlook. S&P Global Ratings revised its outlook to negative from stable in December on the system’s BBB long-term rating. The system has a presence in 28 states through its acute care, insurer and senior care divisions.
Despite struggles Fitch said it still believes “the model set out by ProMedica — having an insurance (payor) division, an acute care (hospital) division, and a post-acute (long term care) division — remains fundamentally sound.” It’s just that “the road to generating expected financial results is longer and more challenging than originally anticipated.”
Paramount Health Plan is ProMedica’s insurance division and HCR ManorCare’s operations were acquired in July 2018 expanding ProMedica’s senior care reach across the country. ProMedica entered into a lease through a joint venture for the real estate property. The joint venture is owned 80% by Welltower and 20% by ProMedica.
Since being stung by insurance losses last year, the system has exited three states’ Medicaid markets, reduced expenses and secured a positive rate increase benefitting Paramount’s bottom line, but the acute care side of the operation is now a sore spot.
“While Paramount is seeing signs of financial relief and ProMedica's long-term care division continues to financially perform as expected, ProMedica's hospital division has suffered a negative impact from the coronavirus pandemic — resulting in operational losses due to the postponement of non-emergent services, combined with some heighted expenses,” Fitch said.
While the financial profile currently suggests a junk grade, Fitch said it’s holding the rating steady in investment grade territory given the outfit's size, scale, national presence, and prior successful track record in all three divisions.
Fitch said the downgrade “necessarily reflects the current operational pressures and uncertainty as a result of the coronavirus” but it also believes “ProMedica’s on-going risk mitigation strategies are beginning to and ultimately will return on to a more positive operational glide-path imparting gradual balance sheet improvements.”
ProMedica stressed that its ratings all remain investment grade and sought to highlight its longer-term prospects and strong liquidity of more than $2 billion in cash and investments that will help weather the pandemic.
“ProMedica started the year strong and on target to exceed financial performance expectations, but the COVID-19 pandemic served as a major disruptor in the second quarter,” the system said in a statement. “While we understand the concern in general, we were disappointed with the new rating, as we had hoped our organization’s strengths would have carried more weight in the determination.
“ProMedica still has a generally strong capital and liquidity position, with $2.2 billion in cash and unrestricted investments. The fair value of the organization’s assets continues to greatly exceed the value of its outstanding debts. Further, ProMedica’s diverse business portfolio strategy has positioned the health system to perform well under challenging circumstances,” the statement read.
In a May investor presentation, ProMedica reported “significant pressure on volumes in acute care and senior care coupled with elevated expense levels” and significant declines in claims activity for its insurer. “ProMedica is taking steps to conserve cash and maximize liquidity.”
The system took advantage of opportunities offered in federal relief packages including taking an advance on Medicare payments and deferring federal employer payroll taxes. It also froze non-essential hiring and spending and temporarily furloughed some employees.
ProMedica received $158 million of direct CARES Act funding.
“Provider business has already begun to recover — senior care recovery expected to take longer to recover due to several factors,” the investor presentation noted.
Ohio Gov. Mike DeWine in late April began lifting restrictions imposed on March 18 on elective surgeries that made a deep dent in hospital revenues, and efforts to pass a new federal relief package that could include hospital support are ramping up this week.
The obligated group reported in the presentation liquidity improvement as it rose to $2.1 billion at the end of April compared to $1.6 billion earlier in the year. First quarter 2020 results also showed improvements over the previous year.
The system also highlighted breathing room awarded by its direct placement lenders who hold directly debt issued in 2015 and 2017. They agreed to extend near-term maturity dates to March 31, 2025. ProMedica also supplemented pledged collateral and lenders agreed to remove an investment grade default trigger.
“New collateral posting requirements mirror provisions in Welltower lease” and a “hard default does not occur until one rating falls below BB-minus,” reads the investor presentation. The organization divested of some properties generating $50 million and strategic partnerships under discussion, the report also said.
The system sold nearly $1.5 billion in 2018 in an offering that included $1.2 billion of taxable bonds to repay a bridge loan used to help finance its large-scale play into the skilled nursing space with the purchase of HCR ManorCare.
The system has additional options that could help bolster the balance sheet by monetizing assets from the HRC ManorCare acquisition that could be sold off should additional stresses arise, Fitch said. Under the terms of the lease agreement, ProMedica can sell up to 49% of their 20% of the owned assets. In addition, ProMedica could choose to sell parts, or all, of HCR ManorCare's operations.
The Toledo-based system had total revenues of $6.9 billion in 2019 with 2020 revenues expected to fall to $6.5 billion due to the coronavirus, Fitch said.
ProMedica holds a leading market share in the Toledo region and operates 13 hospitals in Ohio and Michigan. The system has $2.3 billion of debt.
The Fitch downgrade impacts $394.4 million of tax-exempt debt, all but $1.3 million issued though Lucas County, Ohio, as conduit, and $1.47 billion of taxable bonds.
Moody’s and S&P’s last actions occurred before the pandemic.
Moody’s said in its 2019 downgrade was driven by results that came in below expectation and said “cashflow and liquidity for the next three years are expected to be modest and materially below prior expectations, even assuming a large turnaround in the insurance operation.”
S&P said despite its outlook revision last year it believed management was “proactively addressing these challenges and has made some progress to date.”