Ohio-based ProMedica Healthcare lost a second investment grade rating with a third on the line amid deepening strains from the COVID-19 pandemic and other healthcare sector challenges with the hits landing especially hard on in its senior living division.
S&P Global Ratings on Aug. 9 dropped the system's rating two notches to BB from BBB-minus and placed the rating on CreditWatch Negative over operating losses. That action followed a downgrade in April to BBB-minus from BBB.
"The downgrade reflects our view of the acceleration of operating losses beyond expectations through the interim period ended March 31, 2022, spurred by what we view as elevated human capital social risk that we capture under our environmental, social, and governance factors," said S&P Global Ratings credit analyst Anne Cosgrove.
Those risks stem primarily from the strains on its senior care business that is struggling to recover from the pandemic and acutely feels the skilled nursing shortage.
"If you peel back the onion the largest driver of the losses is the skilled nursing" division, Cosgrove said.
"Also contributing to our rating action is the heightened business and execution risk associated with a potential change in strategy with the skilled nursing business" although if successful potential changes could positively influence the rating in the long term, Cosgrove said.
The system has made changes at the top and is working with a turnaround consultant.
There's a 50% chance of a further rating cut in the next 90 days pending June 30, 2022, results as well as an update on management strategy given recent turnover, S&P said.
ProMedica's ratings have been under pressure since before the pandemic.
It
Federal pandemic-related relief has dried up, so it's no longer propping up balance sheets.
Moody's Investors Service last week put its Baa3 rating, the lowest investment grade, on review for a downgrade.
"The rating action reflects a material cash flow loss and decline in liquidity through the second quarter of fiscal 2022, both greater than expected," Moody's said. "The review will focus on the system's remediation strategies under the guidance of a turnaround consultant, potential sources of liquidity, and the implications of the severe operating stress on both collateral requirements and covenant compliance."
The system has $2.3 billion of outstanding publicly offered and direct loan debt, according to its financial reports.
Fitch Ratings in May
The S&P rating cut this month triggered a
"The ProMedica Obligated Group is currently in negotiations with the financial institution that is a party to the continuing agreement regarding the ratings covenant default and potential resolutions," ProMedica reported in an investor notice posted on the Municipal Securities Rulemaking Board's EMMA website Aug. 23.
The Fitch and S&P downgrades also triggered covenants in the supplemental bondholder agreements or continuing covenant agreements with the financial institutions that hold about $450 million of outstanding debt sold in 2015, 2017, 2018, and 2021 through Lucas County and a taxable issue for Toledo Hospital.
Bank private placement agreements permit ProMedica to deposit two years of pro forma annual debt service on the related bonds to avoid a covenant default due to the ratings downgrades.
"The ProMedica Obligated Group has deposited a total of $72,586,944 with the financial institutions in satisfaction of the requirements of the bank private placement agreements," the notice says.
The system lays out its woes in its latest financial results.
"The COVID-19 pandemic that began near the end of the first quarter of 2020 has continued to adversely impact the system's revenue and operating results throughout 2021 and into 2022," the report said.
ProMedica owns and operates 11 acute care hospitals in Ohio and Michigan; a health insurance company including a dental plan with nearly 390,000 members; and provides senior care in 26 states. System revenues totaled $6.9 billion in fiscal 2021.
Patient volume in its provider division has nearly recovered, but expenses remain elevated while the senior care division recovery is taking longer due to COVID-related admission volume declines, elevated expenses, and the lack of federal relief.
"While it is not possible to estimate the duration or full financial impact of the pandemic, management expects some adverse effects on operations to continue throughout 2022," the quarterly report warns.
"Like many other organizations in our industry, we have been impacted by the effects of rising inflation, including rapidly increasing expenses. We also continue to navigate challenges related to the COVID-19 pandemic and its ongoing impact on our organization," Tausha Moore, director of public relations for the system, said in an email.
"As we move forward, we are continuing to evaluate ways to operate more effectively and efficiently, and we are focused on taking action to strengthen our financial position and build greater stability and sustainability throughout the organization," Moore's statement continued.
The system has made changes at the top. Chief Operating Officer Arturo Polizzi was named president and will also continue as COO and Louis Robichaux joined ProMedica as interim chief financial officer replacing former CFO Steve Cavanaugh.
S&P said it would resolve the CreditWatch placement after reviewing management's strategic priorities as well as performance through the interim period ended June 30, 2022. The interim results were factored into the downgrade and watch, Cosgrove said.
"Further deterioration in the financial profile, particularly unrestricted reserves and operating margins, could result in a downgrade. Future rating actions will also be based on our assessment of management's near-term strategic and operational plans," S&P said.
ProMedica reported an operating loss of $155.1 million for the three months ended June 30, 2022, compared with an operating loss of $8.7 million in the prior year, according to interim quarterly results posted on EMMA Aug. 12. That brings the six month loss to $281.1 million compared to $77.9 million a year ago.
"The losses were primarily driven by labor costs as industry-wide workforce shortages resulted in increased amounts of agency staffing in the senior care and provider divisions," the report said.
Total operating revenue of $1.4 billion for the second quarter fell by 21.8% compared to the prior year primarily driven by reduced revenues in the insurance division after the sale of the Paramount Advantage Medicaid business. Net patient service revenue for the second quarter of 2022 was comparable with the prior year, according to interim results posted through June 30.
ProMedica had $1.6 billion of unrestricted cash and investments, equal to 88.7 days cash on hand.
ProMedica divested of 19 senior care facilities and in January sold 5% of its interest in its real estate venture with Welltower, raising $137.5 million. ProMedica's original equity contribution of $512 million for the senior facilities purchased a 20% ownership in the real estate venture.
In its favor, ProMedica benefits from diversified revenue streams with exposure to three distinct divisions:health care provider services, senior care, and insurance;and its business position as the leading acute care provider in the Toledo area.
Hospital margins have suffered this year and pressure did not abate last month as financial performance struggled due to decreases in outpatient revenue and operating room time at the same time that inpatient lengths of stay rose, according to Kaufman Hall's
"July was a disappointing month for hospitals and put 2022 on pace to be the worst financial year hospitals have experienced in a long time," said Erik Swanson, a senior vice president of Data and Analytics with the advisory firm.
The median Kaufman Hall year-to-date operating margin index was negative 0.98%, for a seventh straight month of negative actual operating margins. The median percent change in operating margin in July was -63.9% from June 2022 and -73.6% from July 2021. Hospitals saw expenses drop slightly, but it was not enough to offset the declining revenues.
