Two Georgia hospital organizations recently received a credit downgrade from Standard & Poor’s. But the financial outlooks for the two are very different going forward, the ratings agency said.
While WellStar Health System, in the midst of an acquisition drive, still shows considerable financial strength, the situation at Oconee Regional Medical Center in Milledgeville is shaky at best, according to S&P.
Marietta-based WellStar, a five-hospital nonprofit system, had its long-term rating and underlying rating lowered to ‘A’ from ‘AA-‘ on various debt issued by local hospital authorities, Standard & Poor’s said in a January analysis.
The agency said the lower rating reflects WellStar’s “weakened financial profile” as a result of its pending acquisition of five Tenet Healthcare hospitals in Georgia for an estimated $661 million.
Just as with an individual, a hospital organization’s credit rating determines the amount of borrowing power it has. The rating is a major factor in whether a loan that the organization requests will be approved, and whether the interest rate to repay the loan will be high or low.
Because of the significant costs involved, many hospitals rely on bond funding — a form of borrowing — for expansion and purchase of new equipment. Credit ratings reflect the hospital’s balance sheet and market share; other factors include the strength of the management team and the insurance payment mix.
S&P classified WellStar’s outlook as stable, which “reflects Standard & Poor’s favorable opinion of WellStar’s strong enterprise profile, including a favorable and expanding market presence and our expectation that WellStar will capitalize on the continued growth in the service area and maintain or strengthen its position as a leader in the greater Atlanta . . . market.”
To finance the Tenet acquisition, S&P said, WellStar will take out a $600 million non-revolving line of credit for one year with an option to renew for an additional year, although management plans on replacing the line of credit with long-term financing.
S&P added, “While we believe there is continued risk in the short term around integration of operations and cultural transitions from the newly acquired hospitals, it is our view that [WellStar’s] operations and cash flow will remain strong over the longer term and balance-sheet metrics will improve under the combined organization.”
Jim Budzinski, executive vice president and chief financial officer of WellStar, said Monday in a statement to GHN that the rating change was expected.
“WellStar has embarked on a number of strategic initiatives that will expand our footprint into new communities,’’ Budzinski said. “These moves are a proactive response to the changing health care landscape.”
He called the Tenet deal a positive move for WellStar and for patients.
“With these changes to our health system, we anticipated an adjustment to our bond rating, based upon the additional debt we will be issuing associated with the Tenet acquisition,’’ Budzinski said. “The S&P bond rating adjustment will have no impact on WellStar’s ability to service its current debt or on its ability to provide world-class health care to our patients.”
WellStar is also acquiring West Georgia Health in LaGrange, S&P noted. The West Georgia transaction, expected to close soon, would not result in a cash payment, but WellStar would assume ownership of West Georgia’s obligations, including roughly $64 million in long-term debt.
Meanwhile, Oconee Regional Medical Center recently saw its S&P credit rating fall from CCC to CC. The nonprofit Milledgeville hospital previously suffered a credit downgrade in 2014, from B to CCC.
The medical center lost $8.8 million from operations in fiscal 2015 after posting similar losses in the previous two fiscal years, S&P said.
The language used by S&P sounded somewhat ominous.
“The downgrade reflects [Oconee Regional’s] extremely weak financial profile combined with significant management turnover, and our opinion that the medical center’s financial commitments appear to be unsustainable in both the near and long terms,” said Standard & Poor’s credit analyst Margaret McNamara in late December.
“As a result, we believe default to be a virtual certainty,” she added.
Oconee Regional’s executives could not be reached for comment Monday.