CHICAGO – Illinois-based Presence Health is highlighting to investors its turnaround plan and sound liquidity as a higher-than-expected 2015 operating loss is expected to trigger a debt service coverage violation that would allow bondholders and banks to accelerate some debt repayments.
On Friday, 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.
The system has about $500 million of debt inherited from the two systems – Resurrection Health Care and Provena Health -- that merged to form Presence in 2011.
Presence recently announced that it expects to report a $186 million loss from operations for fiscal 2015 based on unaudited financial results.
Presence, which is 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 and physician offices and health centers in the Chicago region and east central Illinois.
In an investor presentation posted on the Municipal Securities Rulemaking Board's EMMA website last week in connection with an investor call, Presence said it 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 loss 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.
"We were fully prepared for a potential ratings downgrade,"
Presence continues to maintain a strong balance sheet with approximately $940 million in cash, he added.
"The 'BBB' rating reflects the magnitude of the expected full year loss which deviates significantly from management's projections through the nine-month interim period ended Sept 30," Fitch said. "The losses stem from both recurring and non-recurring items resulting from internal systems processes and controls related to revenue cycle, but are not expected to impact liquidity."
The negative watch is due to the expected violation of covenant governing debt service coverage that will have occurred when audited results are completed.
"The anticipated violation of the rate covenant is an event of default under Presence Health's master indenture and the bank loan documents, with acceleration as one possible remedy," Fitch said. Presence is currently working to obtain waivers from its banks and bondholders. "Removal from Rating Watch is likely once the necessary waivers are received."
Moody's said its review would focus on Presence's quality of earnings, demonstration of internal accounting controls and processes, compliance with bond covenants and liquidity, debt burden, and management strategy. Moody's downgraded Presence Health one notch to its current level in 2014 due to sizable volume declines for two consecutive years.
