Baptist Healthcare System in Louisville, Ky., has been hit with a debt downgrade by Moody's as it prepares for a $296.5 million bond offering set for May 12. Baptist's bond offering comes as the historically healthy hospital company is in the middle of a turnaround plan that includes staff reductions.
Moody's Investors Service downgraded Baptist's existing $288 million in debt to Baa2 from A3 with a negative outlook, meaning the system was likely to see that debt downgraded again. The downgrade was two notches. A lower debt rating can result in higher interest rates in an offering.
Baptist plans to use the net proceeds from the offering for previous capital expenditures and to refinance a portion of a $147 million term loan for the October acquisition of 243-bed Floyd Memorial Hospital and Health Services in New Albany, Ind.
Moody's said Baptist also is looking at a rare operating loss in fiscal 2017, ending Aug. 31. The system's health plan and large physician group practice are contributing to the losses. Staff reductions involved 336 full-time and contract employees, the system said.
Moody's is projecting Baptist will experience a loss on operations of $70 million this year, which was tracking to balloon to $108 million without turnaround efforts.
Those include "reductions to staff and temporary reductions to defined (employee) contribution plans," Moody's said.
That's a long way from Baptist's $10 million surplus on revenue of $2.4 billion in fiscal 2016 and a surplus of $23.6 million on revenue of $2.1 billion the year before.
"We acknowledge that our operating performance has declined recently and was instrumental in (Moody's) rating decisions and are confident that our plans for the future will improve our performance in the near-term and make us much stronger in the long-term," Chief Financial Officer Steve Oglesby said. He, along with Vice President Janet Norton, temporarily took over CEO duties after Steve Hanson abruptly quit in March. Baptist never explained why he left. The system currently is searching for Hanson's permanent replacement.
Baptist is one of the largest hospital systems in Kentucky. It has annual revenue of $2.6 billion and operates seven hospitals in Kentucky and Floyd in Indiana.
It has a strong balance sheet with more than $1 billion in unrestricted cash and investments. It has also improved its position in most of its markets, Oglesby said in a statement.
The system in January completed the conversion in Kentucky of a new electronic health record system from Epic Systems Corp., another positive development acknowledged by Moody's and Fitch Ratings, Oglesby said.
Acquiring Floyd gave the system a foothold in Indiana, not far from Louisville, Moody's said.
Floyd is running an operating surplus, posting operating income of $1.7 million in 2015. It also has a 36% market share in its primary service area on revenue of $327 million. Baptist paid $152.4 million for Floyd plus assumed $90 million in debt.
With the acquisition, Baptist can now slow the migration of patients from Floyd to Baptist competitors in Louisville, including Norton Healthcare, KentuckyOne and the University of Louisville Hospital, Moody's said.
