DALLAS -- Akron, Ohio-based Summa Health’s already weak rating suffered a one notch downgrade as unexpected operating losses and higher capital spending take a toll on its balance sheet.

Moody's Investors Service downgraded the system’s $350 million of debt to Baa2 from Baa1 and warned of further negative action that could loom by assigning a negative outlook. The rating is now two notches above speculative grade.

The healthcare system is looking to privately place $135 million in bonds to fund the upgrade of its main campus under a transformation plan announced last year.

Summa Health system, main campus, Akron, hospital
Summa Health System plans to privately place bonds to fund its Akron campus upgrades. Summa Health System

Moody’s cited the health system’s large and unexpected operating losses through nine months of fiscal 2017 and an increase in capital spending as factors contributing to the downgrade.

“The downgrade is due to a confluence of unexpected events that accelerated an earlier trend of volume declines and contributed to a material operating loss through nine months of fiscal year 2017,” Moody’s noted. “While the system resolved some temporary issues, fundamental challenges in the competitive landscape and multiple physician issues suggest financial recovery will be prolonged.”

Reversing the system’s losses will be “will be challenging … given fundamental changes in the competitive landscape and management turnover," Moody’s wrote.

Summa reported an operating loss of $37 million as of September 2017 compared to an operating income of $20 million in 2016, according to the system’s latest financial report. The system has also seen significant volume declines in a short period. For the first nine months of 2017, inpatient admissions decreased by 9% and outpatient visits decreased by 7%, compared to the same time the prior year.

Summa has also experienced a series of organizational disruptions beginning with the replacement of its emergency department physician group on January 1, 2017 and the resignation of its former CEO in early 2017. On March 13, 2017, Thomas Clifford Deveny was appointed interim CEO. Summa expects to choose a permanent CEO within the next couple of months.

Moody’s said that the downgrade also reflects an increase in capital spending for Summa at it plans to borrow to fund upgrades to the hospital’s flagship campus in Akron.

The proposed bonds are expected to be placed with two banks with staggered commitment periods.

“Summa has ample headroom under covenants even with the operating decline; financial covenants are based on the obligated group,” Moody’s wrote. The obligated group includes Summa Health and Summa Health System. The obligated group does not include Summa Insurance Co.

The project will transition the Akron facility to largely private beds, reconfigure and expand outpatient services, and expand operating rooms as well as other service areas. The campus upgrade is part of a $350 million capital plan Summa announced last year. In December 2016 the system issued $345 million of bonds of which $100 million was used toward the systems capital plan.

Summa employs nearly 300 physicians and is aligned with a broader network of physicians through a physician hospital organization.

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