Ohio-based ProMedica Health System lost one of its investment-grade ratings and remains at risk of losing its other two as the COVID-19 pandemic’s wounds run deep, especially in its senior living division.
Fitch Ratings on Friday dropped ProMedica’s rating to BB-plus from BBB-minus and warned of the potential for further erosion by assigning a negative outlook.
S&P Global Ratings on April 28 lowered the rating to BBB-minus from BBB and assigned a negative outlook. Moody’s Investors Service last week affirmed the system’s investment-grade level-rating of Baa3 but revised the outlook to negative from stable.
The system had $2.3 billion of debt at the close of fiscal 2021. Fitch said its action impacted $1.8 billion of debt sold in 2015 and 2018.
The rating action stems from “significant financial challenges as result of continued pressure of the coronavirus pandemic and escalating expenses, with ProMedica reporting a $252 million operating loss that follows several years of weak performance,” Fitch said.
ProMedica
The operating struggles were “driven in large part by losses in ProMedica’s senior care division, which has faced a host of challenges related to the pandemic, including low occupancy, staffing issues and tightening reimbursement,” Fitch said.
“Fiscal 2021 results follow several years of operating losses, which were driven by the initial disruption of the pandemic in 2020 and the operating challenges related to funding levels within the insurance division in 2019,” Fitch said. Insurance losses drove pre-pandemic rating blows.
The Toledo-based system came to market in 2018 with more than $1 billion of taxable bonds to repay a bridge loan used to help finance its large-scale play into the skilled nursing space. The HCR ManorCare addition in 2018 was also funded with a $512 million equity contribution. HCR ManorCare is the largest not-for-profit post-acute provider in the country.
“The COVID-19 pandemic has disrupted the entire health care industry, and ProMedica has not been immune to its impact,” the system said in a statement. “COVID surges, elective procedure delays, staffing shortages and rising supply costs have presented challenges that we have been working diligently to overcome. It is important to note that both S&P and Moody’s rating agencies maintained ProMedica’s bond rating as investment grade.”
Despite unprecedented industry challenges and recent losses, ProMedica is still a financially strong and viable organization and confident in its business model and updated approach to ensuring stability and sustainability, the system added.
The system has sought to manage the balance sheet blows by divesting underperforming assets, containing other costs and it’s looking for opportunities to add more profitable facilities to its portfolio.
“While Fitch believes these strategies will contribute to improvement over the longer term, the expectation is that financial pressure will persist over the near term as the skilled nursing industry is expected to face significant headwinds, including inadequate reimbursement and staffing challenges, on top of historically thin margins,” Fitch warned.
ProMedica benefits from diversified revenue streams with exposure to three distinct divisions — health care provider services, senior care, and insurance — and its business position as the leading acute care provider in the Toledo area.
Fitch views positively ProMedica’s ability to monetize assets as it did last year when it divested of 19 senior care facilities and in January sold 5% of its interest in its real estate venture with Welltower, raising $137.5 million. ProMedica’s original equity contribution of $512 million for the senior facilities purchased a 20% ownership in the real estate venture. The system told Fitch it expects $75 million in improvements this year.
The system operates 11 acute care hospitals in Ohio and Michigan, a health plan: Paramount, and HCR ManorCare with 157 skilled nursing, 57 assisted living and 116 hospice and home health facilities in 26 states across the U.S. System revenues totaled $6.9 billion in fiscal 2021.
ProMedica has a rating covenant on a portion of its bank debt that triggers a hard default should one rating fall below BB-minus, Fitch said.
“The downgrade reflects ProMedica’s significant loss for fiscal 2021 and a trend of multiyear weaker operations due to the COVID-19 pandemic, and ongoing challenges in the skilled nursing industry,” S&P analyst Anne Cosgrove said. “We expect a loss for fiscal 2022 given the recent COVID-19 surge and elevated staffing costs associated with this, as well as a slower recovery in the post-acute-care business.”
If financial performance does not improve in fiscal 2023, we could lower the rating, S&P warned.
Moody’s comments echoed the other reports.
“The outlook change to negative reflects expectations of minimal or negative cash flow in fiscal 2022, following weak performance in 2021, as significant labor challenges in both the provider and senior care business lines will prolong margin recovery,” Moody’s said.
Occupancy rates for nursing homes and assisted living facilities are recovering but remain well below pre-pandemic levels and are expected to remain so given shortages in permanent staff and high costs for temporary labor. At the same time, stronger fiscal 2021 margins on the hospital provider side are expected to decline this year due to the effect of Omicron on volumes and labor costs in the first quarter, Moody’s said.