NEW YORK - Standard & Poor's Ratings Services said it lowered its long-term rating, issuer credit rating (ICR), and underlying rating (SPUR) on Sisters of Mercy Health System Inc. (Mercy), Mo.'s bonds, issued by various issuers, to AA-minus from AA.
The downgrade is due to low liquidity, an unexpected drop in operating income, and continued high capital spending that will make it difficult to return liquidity quickly to levels commensurate with the rating. We expect some rebound in liquidity, as Mercy plans to issue $250 million-300 million of new money later this year to help fund its robust capital program.
To some extent, liquidity is currently depressed by the downturn in investment markets this year, but even with a market rebound and the benefit of new money, Mercy's overall credit profile is expected to be more in line with a AA-minus for the near future.
The AA-minus ratings reflect Mercy's very low debt level, with a debt-to-capital ratio of just 18%, which will remain modest at 26%, assuming a $300 million new issuance. The hospital's debt burden is less than 1% of revenues and we expect it to remain well below 2% on a pro forma basis.
Mercy's revenue base is diverse, with acute-care operations in seven markets in four Midwest states, approximately 1,000 employed physicians, and a sizable health plan with more than $500 million in revenue, for a total revenue base of $3.8 billion.
Mercy's financial dispersion is favorable, with five of the seven acute-care regions profitable in fiscal 2008 and none of the regions contributing disproportionately to the bottom line.
"The stable outlook reflects the likelihood that Mercy's business position in its key markets will be stable or improving, while liquidity has probably bottomed out and is likely to begin to rise if investment markets recover, and the new money is issued later in 2008," noted Standard & Poor's credit analyst Liz Sweeney. "Furthermore, the system has reduced its overall capital spending by $80 million for the 16 months ending June 30, 2009; however, capital spending will remain sizable and given the current operating margin, we do not expect dramatic improvement in the balance sheet within the next 18 months," Sweeney concluded.
