Breach at BHS prompts bond rating reviews

The newly consolidated Butler Health System and Excela Health operation is off to a shaky start following the breach of a bank loan agreement at BHS, which prompted a negative bond rating watch and a review by a second ratings agency.

Fitch Ratings revised its rating watch to negative on $79 million in revenue bonds after being notified that Butler Health System was in breach of a loan agreement with Charlotte, N.C-based Truist Bank as of Dec. 31.

Fitch assigned BHS revenue bonds an A rating.

BHS drew the loan of $20 million in 2015 to build a medical building and a balance of $15 million remained as of Dec. 31, according to a statement from BHS president and CEO Ken DeFurio. Truist Bank officials declined to comment.

“We are fully cooperative with Truist and we will have ongoing discussions with them,” Mr. DeFurio said. “Should Truist Bank declare an event of default, such declaration will be required to be communicated to our bondholders and ratings agencies, and thus be publicly available.”

Joining Fitch in a bond rating review of Butler Health System was Moody’s Investors Service, which placed the newly merged health system under review for a downgrade from Baa2.

That review was prompted by BHS’ anticipated breach of its debt service agreement as of Dec. 31 and the assessment that the “system has had negative operating cash flow in almost every month from January through September 2022,” according to Moody’s. “An upgrade is unlikely at this time given the organization’s weak operating results, deteriorating cash position and elevated risk for a covenant breach.”

The health system is required to meet various metrics for the bank loan, including having a minimum 90 days cash on hand, as measured twice a year. Failure to meet any of the loan covenants would trigger a default and immediate acceleration of debt at the bank’s discretion within 30 days.

In January, Butler Health System merged with Greensburgbased Excela Health to create a fivehospital system that has more than $1 billion in total revenue. The systems are the biggest health care providers in Butler and Westmoreland counties, but each faces stiff competition from larger Pittsburgh-based rivals Allegheny Health Network and UPMC in addition to declining patient admissions and rising costs.

BHS reported an operating loss of $23 million on total operating revenue of $226.7 million for the six months ending Dec. 31. For the same six months, Excela reported a loss from operations of $15.3 million and operating revenue of $324 million.