ProMedica sinks further into junk amid turnaround efforts
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Ohio-based ProMedica Health System slid deeper into speculative grade territory amid bruising balance sheet losses tied mostly to its senior care business.
Fitch Ratings cut the system’s rating two notches to BB-minus from BB-plus on $1.8 billion of outstanding bonds sold in 2015 and 2018 and warned of the potential for a further hit by putting the credit on Rating Watch Negative. The system has $2.3 billion of bonds and capital leases outstanding.
The May 9 rating cut “reflects the precipitous decline in liquidity in fiscal 2022, which has placed significant pressure on an already weak balance sheet and leaves the organization with very little flexibility should management’s financial improvement plan not materialize fully,” Fitch wrote. “The ‘BB-‘ rating also reflects Fitch’s concern related to the retained senior care business.”
ProMedica announced plans in fiscal 2022 to shed its skilled nursing facilities, plans that were viewed favorably by the rating agencies.
The system closed in December on the transfer of most facilities formerly subject to a lease between Well PM Properties LLC and HCR ManorCare Inc., although not all of the transfers have been completed.
Assisted living and memory care facilities remain part of the remaining system and while those business lines didn’t suffer the same hits as skilled nursing during the COVID-19 pandemic, pressures remain on staffing and in other areas.
As part of its ongoing turnaround plan, the system struck a $710 million deal in February to sell hospice and home health assets with a closing expected later this year. The system intends to use the proceeds to pay down $452 million of direct placement debt which were the subject of covenant violations on debt-to-capital ratios in 2022.
The lenders agreed to suspend the covenant giving ProMedica breathing room to close the hospice sale and pay off the private placement debt.
“The Negative Watch reflects the uncertainty surrounding the sale of hospice and home health, for which ProMedica has not obtained the necessary approvals from regulators yet,” Fitch said. “However, if there is any delay beyond what management has articulated, including the pay off the private placement debt or if the remaining divisions operating performance is weaker than expected, a downgrade is likely, particularly in light of ProMedica’s leverage metrics, which are light for the rating.”
Fitch said it could move the outlook to stable if the deal is executed as planned and the transition of the skilled nursing business is fully completed.
The system has experienced years of operating losses including $518 million in fiscal 2022.
Moody’s Investors service affirmed its speculative grade Ba2 rating May 9 and retained a negative outlook.
The Fitch and Moody’s reports came after the system published its fiscal 2022 results.
The affirmation stems from the “material reduction in cashflow losses and operating leases from the transfer of nursing homes, benefits from the expected divestiture of hospice and home care, reduction of near-term covenant and acceleration risk following a bank consent letter and suspension of covenants, planned elimination of bank debt and covenants, and the ongoing recovery of the well-positioned provider business,” Moody’s said.
“We are pleased that Moody’s reaffirmed ProMedica’s current bond rating, noting our efforts to address financial losses and facilitate the ongoing recovery of our well-positioned provider business,” ProMedica spokeswoman Tausha Moore said in a statement. “We remain confident in our strategic plan and optimistic about the long-term prospects for creating a more stable and sustainable organization.”
ProMedica benefits from a leading inpatient market share in its primary service area of Toledo where it’s headquartered. It operates 11 hospitals and one joint venture facility in Ohio and southeast Michigan, a health plan, and its senior facilities.
ProMedica’s ratings began deteriorating before the COVID-19 pandemic in 2018 after taking on more than a billion dollars in debt for the large-scale play into the skilled nursing space through the acquisition of HCR ManorCare.
Insurance losses drove more rating cuts before the pandemic led to financial stress at its hospitals and even more in its senior-focused skilled nursing division.
S&P Global Ratings cut the rating to BB from BBB-minus in August and placed the rating on CreditWatch with negative implications. In January, S&P removed the CreditWatch and assigned a negative outlook.
The S&P downgrade triggered a covenant violation and a non-payment related default under 2018 standby letters of credit that would allow the financial institutions to accelerate all of the obligations absent the granted waiver.
Moody’s dropped the rating two notches to Ba2 from Baa3 in September. Fitch in May 2022 dropped ProMedica’s rating to junk.
