St. Joseph's Hospital in St. Paul is one of three acute care facilities operated by HealthEast, which was dropped to junk this week by Fitch Ratings.

CHICAGO – Minnesota-based HealthEast Care System lost its Fitch Ratings investment grade rating over its lack of progress in improving profitability.

Fitch on Wednesday lowered its rating to BB-plus from BBB-minus and assigned a stable outlook. The action impacts the system's $149 million of debt issued last year through the St. Paul Housing and Redevelopment Authority.

"The downgrade to BB-plus reflects the lack of improvement in HealthEast's profitability, which has underperformed Fitch's expectations, and which is necessary to improve the weak liquidity position," analysts wrote.

Fitch's prior rating affirmations were based on expectations that operating margins would improve to near 3%. HealthEast missed its profitability targets in fiscal 2015 and through February in fiscal 2016. "Further, the corporation's current physician alignment strategy is likely to inhibit any meaningful improvement in financial results over the near to medium term," Fitch added.

HealthEast had $173.8 million in unrestricted cash and investments at fiscal year-end 2015 Aug. 31, which translated in to 69 days cash on hand, and cash to debt of 50.7%. The system's profitability has rebounded but is still falling short of expectation, Fitch said.

HealthEast maintains a leading market position of 30% in its competitive St. Paul service area, followed by Allina and HealthPartners. The HealthEast system includes three acute care hospitals -- St. Joseph's Hospital, St. John's Hospital, and Woodwinds Hospital. It also operates a long term acute care facility, Bethesda Hospital, and various clinics that combined generated $974 million in total revenues in fiscal 2015.

The system, which has a total of $333 million of debt, is considering borrowing $10 million to $50 million this year. HealthEast Care System last year returned to the market with a debt restructuring aimed at strengthening its balance sheet. At the time, both Fitch and S&P Global Ratings assigned BBB-minus ratings. The system won back its investment grade level rating from Fitch in 2007 and from Standard & Poor's in 2012.

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