Liquidity concerns drive negative outlook for Temple health system

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Projected operating deficits and a heavy reliance on state funding triggered a negative outlook for Temple University Health System's junk-rated bonds.

Moody’s Investors Service on Wednesday revised the outlook for its Ba1 rating on $478 million of outstanding debt issued by TUHS to negative from stable, citing elevated risks during a time when the university health system faces weak margins and growing healthcare competition. The bonds were issued through the Philadelphia Hospital and Higher Education Facilities Authority.

“The negative outlook reflects our view that execution risks will be elevated as management seeks strategic options to reduce deficits and grow liquidity in efforts to maintain a viable and competitive clinical operation," wrote Moody’s analyst Beth Wexler. “Though Temple University engaged consultants and has appointed a chief restructuring officer to improve operations, adjust the system's business model and right size operations, efficiencies will be difficult to realize as industry headwinds grow and consolidation in the Philadelphia market further disadvantage TUHS.”

Wexler said while there have been some recent improvements, the expected continuation of “deep operating deficits” will lead to a heavy reliance on supplemental funding from the Commonwealth of Pennsylvania. She said TUHS, which is affiliated with the Lewis Katz School of Medicine at Temple University, is expected to encounter revenue challenges due to a “disproportionately high” exposure to governmental payers at nearly 75% of gross revenues. The absence of “significant operating improvement” will constrain capital spending with liquidity likely declining over time, according to Wexler.

TUHS could experience a downgrade if there is weakening cash flow, increased financial leverage or an adverse change in its relationship with Temple University, according to Moody’s. The system would be in position for an upgrade if it can demonstrate a “fiscally sustainable business plan” that shows durable improvements toward operating performance or substantially grows balance sheet cushion.

The TUHS press office did not immediately respond for comment on the Moody’s revision.

TUHS consists of Temple University Hospital, TUH-Episcopal Campus, TUH-Northeastern Campus, Fox Chase Cancer Center, Jeanes Hospital, Temple Transport Team and Team Physicians, Inc. Temple, which is a large public research university with nearly 40,000 total students, has debt ratings of Aa3 from Moody’s and A-plus from S&P Global Ratings.

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Not-for-profit healthcare Ratings Temple University Pennsylvania