CHICAGO – Illinois-based Presence Health was downgraded again this week.
Standard & Poor's Tuesday downgraded the system two notches, to BBB-minus from BBB-plus, and put the rating on CreditWatch with negative implications.
The system has about $500 million of debt sold through the Illinois Finance Authority on behalf of Resurrection Health Care Obligated Group and Provena Health Obligated Group. The merged to form Presence in 2011.
"The downgrade reflects our view of Presence Health's significantly higher unaudited operating losses in fiscal 2015 (following a few years of ongoing operating losses), coupled with a weakened balance sheet as well as an expected technical covenant violation related to debt service coverage for fiscal 2015," said Standard & Poor's analyst Suzie Desai.
Some of the loss is due to one-time expenses but the downgrade "also reflects the fact that the correction of accounting issues uncovered sizable underlying operating losses that were being masked by one-time revenue events and thus, expect that a full turnaround to positive operations could take longer than a year," according to S&P.
A new administration uncovered the accounting issues. The CreditWatch placement is partially due to the risk of debt acceleration tied to the losses. Under the its debt covenants, the expected technical covenant violation that would occur when audited financial results are finalized allow public bondholders, banks, and Assured Guaranty to accelerate debt payment.
"Management indicates it is currently having active discussions with the six banks, who are holders of its direct-purchase debt or term loan lenders, Assured Guaranty (the insurer of 1999A and B bonds), and its public bondholders on how to resolve its covenant violation," S&P said.
Earlier this month, Fitch Ratings lowered the system's rating one notch to BBB and put it on negative watch. Moody's Investors Service recently put the system's Baa2 rating on review for a downgrade.
Presence recently announced that it expects to report a $186 million loss from operations for fiscal 2015 based on unaudited financial results.
Presence, the largest Catholic not-for-profit system in Illinois, generated more than $2.5 billion in revenue last year from its 11 hospitals, senior facilities, physician offices and health centers in the Chicago region and east central Illinois.
In a recent investor presentation posted on the Municipal Securities Rulemaking Board's EMMA website in connection with an investor call, Presence said it was undertaking an "aggressive turnaround" plan that has identified $170 to $255 million of potential savings over a two-year time frame. It includes $50 million in labor savings and $50 million to $90 million from revenue cycle improvements. The system blames some of the operating losses on poor billing collections.
The system's new management team, led by Michael Englehart who took over as president last October, said the operating loss resulted after accounting adjustments were made following a deep fiscal review.
The system is stressing its sound liquidity with cash to cover 133 days of operations. The system also has hired consultants to help shore up its books including Crowe Horwath to work on accounting practices and Kaufman Hall as financial and strategic advisor.
The hospital said Wednesday its statement after the Fitch downgrade still stands.
"Well before the Fitch rating announcement, we were engaged in crafting comprehensive plans and initiating the necessary steps to decisively address our financial issues," Englehart said. "Yes, in the short term the bond ratings may affect the cost of future borrowings and some of our current debt, as well as create operational challenges. In the long term however, the actions we're already taking will make us stronger and more effective as an organization going forward."
