System’s bond rating downgraded to junk status
Fitch Ratings Inc. and Standard & Poor’s on Friday downgraded Tower Health System’s bond rating to below investment grade, or junk-bond status.
That is, purchasing the bonds are considered speculative.
The bond rating agencies also revised West Reading-based Tower’s outlook to negative on the hospital system’s $1.3 billion of long-term debt.
The hospital system said in an emailed statement to MediaNews Group that it is taking aggressive steps to improve its financial performance.
“Tower Health remains focused on providing high quality, integrated care in facilities that are clean, safe, and ready to meet the health care needs of the communities we serve,” Tower said in an emailed statement.
Tower’s operating losses for fiscal year 2020 of almost $400 million triggered the downgrades. Fiscal year 2020 ended June 30.
The agencies said the losses resulted from underlying operating issues that were further exacerbated by the COVID-19 pandemic.
On top of losses due to the coronavirus, Tower continues to struggle to integrate five acute care hospitals it acquired from Community Health Systems.
In May 2017, Reading Health System purchased Pottstown Memorial Medical Center, Pottstown; Brandywine Hospital, Coatesville; Phoenixville Hospital, Phoenixville; Jennersville Regional Hospital, West Grove; and Chestnut Hill Hospital, Philadelphia.
It was rebranded as Tower Health.
Then, in December 2019 Tower added St. Christopher’s Hospital for Children in partnership with Drexel University in Philadelphia. Bond disclosures show Tower has been operating on diminishing margins, and that raised concerns from bond ratings services.
“While improvement is expected in 2021, the system still expects an operating loss of approximately $115 million even under their most optimistic scenario,” the Fitch analysis said.
Fitch went onto say that Tower remained in a significantly more sensitive position than 2019, despite selling 23 of its properties in a lease-back deal.
Tower response
Tower said its Transformational Excellence initiative will achieve $230 million in cost savings over the next 24 months.
In addition, Tower will retain an external consultant to identify additional opportunities for cost control and improved financial performance.
The consultant will be selected this week, Tower told investors.
Responding to a Reading Eagle inquiry Tower Health said Friday in an emailed statement:
“In their analyses, Fitch and S&P cite the extraordinary impact of the COVID-19 pandemic on Tower Health’s financial performance, while also acknowledging that — leading into the arrival of the virus — the system was still working through challenges in integrating the five acute care hospitals acquired from Community Health Systems (CHS) in the fall of 2017. Those challenges included ongoing operating losses, along with costs associated with necessary investments in people, facilities, services, and technologies such as the Epic electronic health record across the system.
“The rating reports are sobering,” Tower said in its response, “but also acknowledge elements of strength for the system including the continuing profitability of Reading Hospital, Tower Health’s overall market share, the system’s improved risk in its debt profile, and adequate liquidity. S&P describes Tower Health’s enterprise profile as ‘strong,’ citing our evolution as an integrated delivery system and academic medical center.”
Ratings slip
Fitch’s downgrade to
BB+ from BBB represents as two-notch slip.
Of the 260 hospitals it rates, Fitch has downgraded 14 (including Tower) since the pandemic hit the United States in March, said Kevin Holloran, senior director with Fitch.
Some, such as Main Line Health, which operates in much of the same market as Tower, have remained steady. Fitch confirmed Main Line’s rating of AA earlier this month.
S&P lowered its longterm rating three notches to BB+ from BBB+.
“The three-notch downgrade reflects the significant deterioration in Tower Health’s financial profile in the fiscal year ended June 30, 2020, including a severe loss from operations and negative cash flow resulting in inadequate debt service coverage ratios,” said S&P Global Ratings credit analyst Kenneth Gacka in a news release. “The rating action also reflects our weakening assessment of the enterprise profile. In our view, the continued lack of intended results, including financially, from recent-year acquisitions lessens our view of the strength of recent-year growth.”
S&P acknowledged Tower’s initiatives underway to improve operations but said the magnitude of the losses creates a difficult path to recovery, particularly given that volumes are not yet at prepandemic levels.
“Also, we believe continued investments to build out Tower Health’s nascent, evolving system, along with
likely losses at the Chester Montgomery Philadelphia hospitals, will weigh on the financial profile in the near term until certain strategies take hold,” S&P said.
A challenging future
The coronavirus has changed the health care landscape, Holloran said. Telehealth is taking hold as are other changes.
Fitch does expect gradual improvement in operating margins over the longer term, not only from Tower’s historically strong Reading Hospital business, but also from the further integration of the other hospitals, and the development of new service lines, most notably Tower’s transplant services.
“Fitch expects a slow economic recovery trajectory with high unemployment levels and the U.S. GDP remaining below the fourth quarter 2019 GDP level through most of 2021,” Fitch wrote. “Should economic conditions decline below these expectations or should subsequent wave of infections trigger a further drop in economic activity, Fitch would expect to see an even weaker economic recovery in 2021, which could pressure Tower’s rating.”
Tower consists of six acute care hospitals (1,468 licensed beds), Tower Health Medical Group, Tower He a lt h/ U PMC Health Plan and a foundation, as well as numerous other non-obligated affiliates. Tower had over $1.96 billion in revenues in fiscal 2020.