On Thursday, S&P Global Ratings cut its debt rating for Catholic Health Initiatives another notch – a decision that CHI called disappointing and fails to reflect improvements that the hospital giant has made over the past several quarters.
S&P dropped CHI's rating to BBB-plus from A-minus, leaving the hospital company just two notches above a junk rating. The current BBB-plus rating was upgraded from negative outlook to stable outlook, meaning no further downgrades were looming.
“While management's current turnaround plan has created an expectation for stabilization and modest improvement over the next 18 months, it is our opinion that it will take several years on the current financial improvement trajectory for CHI to return to a higher rating,” said S&P credit analyst Martin Arrick in the downgrade report.
Englewood, Colo.-based CHI, which is in affiliation talks with Dignity Health, responded Thursday that its turnaround plan is gaining traction as evidenced by improved earnings in its second quarter ended Dec. 31.
Moreover, its “alignment” discussions with San Francisco-based Dignity continue, even as it works its turnaround plan, CHI said in a statement. A merger between the two companies would create the nation's largest not-for-profit hospital chain with 142 hospitals combined and annual revenue of more than $26 billion.
CHI noted in a statement that it has “considerable strengths,” including $16 billion in annual revenue, 103 hospitals spread across 22 states and a solid balance sheet with assets of $22.7 billion.
“We expect a strengthening of our financial performance – and a strengthening of our credit profile,” CHI said.
CHI narrowed its operating losses in its fiscal second quarter. It posted operating losses of $75.6 million before charges in the quarter compared with operating losses of $93.7 million in the year-earlier quarter. Revenue increased in the quarter to $4.2 billion from $4 billion in the year-ago period.
The system's turnaround plan is now being shepherded by interim operating chief Anthony Jones, a Los Angeles-based management consultant who replaced longtime COO Michael Rowan, who resigned in December.
CHI's debt is relatively high for a system of its size.
CHI's annual debt service, or interest paid on its bonds and borrowing, is about $460 million on total debt of $9 billion.
While downgrading the company in July from A-plus to BBB-plus, Fitch Ratings said its maximum annual debt-service coverage ratio (the ratio of cash available to pay its debt obligations) decreased in the first nine months of 2016 to 1.3 times from 1.9 times in the comparable period in 2015 while cash-to-debt decreased to 66.9%.
Dignity's overall debt is lower at $5.25 billion, but it, too, has hefty maximum debt service to carry, $408 million annually.
The two companies expect to decide sometime in 2017 whether a tie-up is in their best interests.