Fitch Ratings downgraded Temple University Health System to speculative grade BB-plus from investment grade BBB-minus on Tuesday afternoon.
The downgrade affects $524 million in debt.
Fitch has a stable outlook on the debt.
About a year ago Moody’s Investors Service downgraded TUHS to the equivalent Ba1 rating.
Fitch senior director Eva Thein pointed to four negative factors and one positive factor to explain the downgrade.
In the first nine months of the system’s fiscal year it had a large operating loss of $59 million, Thein wrote. This is a negative 6% operating margin.
The system’s debt coverage of maximum annual debt service is weak at 0.9 times for the fiscal year’s first nine months. Debt load remains manageable at 3% of system revenues. However, the system expects to break even this quarter and this would allow the hospital to exceed 1.1 times coverage. A failure to meet 1 times coverage would be a default, Thein wrote.
The hospital’s management has a plan to recruit high-caliber physicians, increase its outpatient network in a suburban market and affiliating with Fox Chase Cancer Center to improve the payer mix. However, TUHS is unlikely to benefit from these changes in the short-term, Thein wrote.
TUHS currently relies heavily on patients whose medical coverage is paid for by the government. These may be subject to fiscal pressures, Thein wrote.
On the plus side, the system the hospital provides a range of specialized medical care not widely available and serves as a de facto safety net hospital. The system’s main hospital is of great importance to Philadelphia area, Thein wrote.
The system did not immediately respond to a request for comment.