Tower Health hit with bond downgrade, seeks buyer
Standard & Poor’s lowered Tower Health’s bond rating by two notches on Tuesday.
Another rating agency, Fitch, hit Tower with a threenotch downgrade on Monday. The ratings are well into high-risk junk bond territory.
The move was expected as the financially foundering system, anchored by Reading Hospital, tries to find a buyer to rescue it. Tower had said it could sell hospitals as soon as the end of December but has not yet closed a deal.
Tower announced to staff last week it would attempt to find a partner for the whole system as part of its ongoing turnaround process.
In its rating report, S&P said it was uncertain “as to Tower Health’s ability to execute on a partnership or divestiture of as
sets in a timely manner.”
“The two-notch downgrade reflects our view of Tower Health’s continued significant operating losses through the interim period ended Dec. 31, 2020, which have been higher than expected, coupled with recent resignations of members of the senior management team,” S&P said in the March 2 report.
S&P said that in addition to the turnover, the rating action was driven by “risk management inadequacies” and inability to execute previously established strategic plans, which have led to financial distress.
Last month Tower’s chief financial officer Gary Conner resigned, and later CEO and President Clint Matthews announced his immediate retirement. Board member P. Sue Perrotty was named interim CEO.
Tower has $1.3 billion in long-term debt, which is secured by a pledge of gross revenues from the system, which is Reading Hospital and five Philadelphia-area hospitals acquired from Tennessee-based Community Health System in 2017.
S&P and Fitch noted that the system’s cost-saving efforts are not enough to turn around the finances.
Tower Health has approximately $2 billion in operating revenue. Tower Health also partners with Drexel University to run St. Christopher’s Hospital for Children, which it acquired January 2020. Tower has a joint venture inpatient behavioral health facility in Bern Township in partnership with Acadia Healthcare.
‘Turnaround process’
Tower responded to the S&P downgrade, emphasizing its “careful, thorough and diligent turnaround process.” It is seeing positive results from initiatives now underway.
“We anticipated the Standard & Poor’s downgrade and recognize the challenges it outlines,” Tower said in an emailed statement. “Importantly, our revenue, admissions, and surgeries are recovering as we had planned, and in some cases, better than we planned. Under the leadership of our interim CEO P. Sue Perrotty and our board of directors, we continue to explore a variety of opportunities and potential partnerships to build a strong, sustainable future for Tower Health. We are moving forward as a unified health system, guided by our mission to provide high-quality, affordable and accessible care for each community we serve.”
S&P noted Reading Hospital’s relative strength is buoying the system.
“At the time of our last review, we had expected Tower Health to improve operations and meet budgeted targets,” S&P said. “However, since then, Tower Health has generated a steep system loss of $148.8 million relative to the budgeted $131.1 million loss, which, while better than the very negative margin at year-end, is below expectations and represents negative earnings before interest, depreciation and amortization.”
S&P noted the management and operating challenges come at a time of significant uncertainty, as the system may be looking to partner with a larger, strong system or sell nonperforming assets. Tower’s operational weakness has been further exacerbated by the impact of the COVID-19 pandemic.
A winding road
Closing a hospital requires 90 days notice by law.
The Federal Trade Commission has oversight of mergers but when proposed mergers are reported to the FTC, that information is not public.
The FTC and the Department of Justice review most of the proposed transactions that affect commerce in the United States and are over $94 million, and either agency can take legal action to block deals that it believes would “substantially lessen competition,” according to the FTC. The FTC outlines its process on its website.
The FTC had no comment.
The Pennsylvania Department of Health and state attorney general are involved if a hospital is sold to another medical entity. The attorney general has the authority to approve or disapprove the sale but does not determine whether the new operator is eligible to run a hospital.
The attorney general’s office previously declined comment on Reading Eagle’s inquiry about the sale of any of the Tower Health hospitals.
If a hospital is sold and a new owner intends to operate a health care facility, the state Department of Health is responsible for issuing a hospital license or transferring an existing license.
The department determines whether the new operator is a responsible entity through review of responses to a series of questions that are submitted with the change of ownership application, said Maggi Barton, deputy press secretary.
Hospitals must give the department 90 days notice and publish a public notice prior to shutting down.
According to the regulations, a hospital is required to give 90 days written notice to the department of its intent to close, and as part of that notification submit a closure plan that addresses financial stability; changes in the governing body, administration and medical staff; staffing changes; transition plan; status of payments; policies and procedures and a communication plan.
In addition to Reading Hospital, Tower Health operates six hospitals in the Philadelphia region, including Pottstown Hospital and Phoenixville Hospital.