ProMedica Health downgraded after HCR ManorCare acquisition

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Ohio-based ProMedica Health System took a four-notch hit from S&P Global Ratings due to its increased debt burden following the acquisition of HCR ManorCare's operations.

S&P lowered the rating to BBB from A-plus.

The deal closed July 26. ProMedica used $524 million of cash and a $1.15 billion bridge loan with Barclays to finance the transaction. The bridge loan has a final maturity of up to 12 months and is expected to be refinanced into long-term debt.

ProMedica also entered into a new joint venture with Welltower Inc., a healthcare-focused real estate investment trust, to own 20% of the real estate associated with the organization.

“The multi-notch downgrade reflects the significant debt issuance of $1.15 billion and cash usage of $524 million to fund ProMedica's full acquisition of HCR ManorCare's operations but not most of the hard assets, as well as the 20% investment in the real estate joint venture with Welltower," said S&P analyst Anne Cosgrove.

The outlook is stable. The system’s rating has been on credit watch with negative implications since April 26. Moody’s Investors Service is also reviewing the system’s A1 rating for downgrade.

The system has also entered a long-term lease with a Welltower subsidiary. S&P said that the lease payments are significant and "much larger than debt service payments." The payments include annual inflators that will continue to increase fixed debt-related payments over the lease's life.

The rating agency noted that post-acquisition, the system's cash flow could be stronger and there are strategic opportunities for ProMedica to diversify revenues and grow outside of the immediate northwest Ohio market.

“This acquisition doubles ProMedica's overall revenues to an estimated $7 billion and we expect operating synergies over the next five years,” S&P said. “In addition, this transaction might also position ProMedica for future alliances and partnerships.”

HCR has more than 50,000 employees providing services in 450 assisted living facilities, skilled nursing and rehabilitation centers, memory care communities, outpatient rehabilitation clinics, and hospice and home health agencies operating under the names of Heartland, ManorCare Health Services, and Arden Courts.

ProMedica, which operates in six states, said the acquisition would expand its business into 30 more states. After the acquisition the system will employ approximately 70,000 people with projected annual revenues of $7 billion.

HCR ManorCare had filed for bankruptcy in March, as it struggled to keep up with rent payments amid declining Medicare reimbursements.

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