S&P: ProMedica Healthcare, OH Ratings Lowered To 'A+' From 'AA-' On Criteria Application And Reduced Financial Flexibility

S&P Global Ratings lowered its long-term rating on various ProMedica Healthcare Obligated Group, Ohio, debt obligations to 'A+' from 'AA-'. The rating action affects the series group's 2015A taxable fixed-rate bonds; Lucas County, Ohio's series 2015B, 2011A, 2011D, and 2008D fixed-rate tax-exempt bonds issued for the obligated group; and the Lenawee County Hospital Finance Authority, Mich.'s series 2011B and 2011E fixed-rate bonds issued for the obligated group. The outlook is stable.

The downgrade reflects both the application of "U. S. And Canadian Not-For-Profit Acute Care Health Care Organizations" criteria published on March 19, 2018. "The downgrade also reflects our view of diminished financial flexibility in light of higher leverage, recent weaker operating performance, and reduced liquidity over the past few years owing to higher capital expenditures," said S&P Global Ratings credit analyst Anne Cosgrove. This review takes into account the upcoming $300 million series 2018 upcoming fixed rate tax-exempt bond issue in early May; we expect bond proceeds will fund the Toledo Hospital Generations tower and the Bixby/Herrick replacement facility and refund $80 million of 2017G private placement debt.

The 'A+' rating reflects our view of ProMedica's leading business position in the greater Toledo and southeast Michigan market (despite the loss of St. Luke's Hospital), with additional strategic investments (including the recent relationship with the University of Toledo [UT]) that could enhance ProMedica's position. The rating also reflects ample unrestricted reserves, with cash on hand at about 203 days; adequate debt levels; and solid maximum annual debt service (MADS) coverage of about 4.65x. ProMedica has had weaker operating performance over the past two years partially due to one-time expenses from an electronic health record implementation in fiscal 2016 and some restructuring and severance costs. In addition, outpatient volumes have softened somewhat. However, we expect a moderate operating margin improvement over the next few years.

Over the next few years, ProMedica's management team will focus on optimizing the large electronic health record implementation, undergoing a comprehensive transformation initiative to improve financial performance, and investing in larger capital projects such as a new patient tower on its flagship Toledo Hospital campus. Although management has many initiatives underway and the next few years will be more challenging given the multiple areas of focus and constrained financial performance, ProMedica has a history of executing its initiatives.

The stable outlook reflects our view of ProMedica's leading business position and ongoing strategic investments in its ambulatory care network, service lines, physician integration, and growing insurance plan. In addition, the outlook reflects our view of ProMedica's comprehensive plan to improve financial operations and initiatives to optimize the electronic health record system. The outlook further reflects our expectations of moderate improvement in operating performance and maintenance of at least 200 days' cash on hand overall.

Although we do not expect to do so, we could lower the rating in the two-year outlook period if operating performance and cash flow do not improve. In addition, we could lower the rating or revise the outlook to negative if unrestricted reserves decline significantly or if ProMedica fails to generate at least 3.5x MADS coverage.

Given what management believes to be a turnaround of longer than a year, we do not expect to raise the rating over the outlook period. However, we could do so if ProMedica brings operating cash flow and margins closer to levels commensurate with a higher rating while improving MADS coverage to 4.5x-5.0x consistently. A higher rating would also be contingent on incremental improvement to unrestricted reserves and maintenance of solid debt-related ratios.
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