While 2016 went in the books as one of the most aggressive years for regional health care expansion planning, Centura’s Penrose-St. Francis Health Services will — at least in part — be playing catch-up in 2017.
Last year posed funding challenges for Catholic Health Initiatives, financier of Centura’s planned Colorado Springs projects, including a $100 million St. Francis expansion and possibly a $500 million hospital at Fillmore Street and Centennial Boulevard.
CHI, a nonprofit, was hit last summer with a credit rating downgrade by S&P Global Ratings, Fitch Ratings and Moody’s, and the Arapahoe County-based organization is starting 2017 with a negative outlook.
The forecast comes as Fitch downgraded CHI’s long-term rating on approximately $6 billion of outstanding debt from A+ to BBB+ during the summer 2016. Fitch also downgraded the short-term rating on $978 million of debt additionally supported by CHI’s self-liquidity to F2 from F1+, according to the ratings company. S&P had already downgraded CHI’s long-term and underlying ratings in April 2016 from A to A-minus because of persistent operating losses and a drop in unrestricted cash. In November, S&P said another downgrade could occur.
CHI operates more than 100 hospitals and a number of critical-access facilities and living communities in 19 states. But the organization has struggled recently with decreased use of its hospitals, adjustments in reimbursements and ever-changing models of care, said Michael Romano, national director of media relations for CHI.
And the organization’s ability to finance projects could impact health care expansion at the regional level. St. Francis announced last year a nine-month delay to its proposed expansion project because CHI was consolidating funds for out-of-state projects.
“CHI’s financial performance in the first quarter of the current fiscal year was disappointing as we continue to work through a comprehensive performance-improvement plan,” said Romano.
“We believe the performance-improvement plan will yield positive results and significant progress over the next six months.”
Romano said CHI is expecting to strengthen the company’s financial performance and its credit profile throughout the 2017 fiscal year.
“CHI has considerable strengths, including its size and geographic diversity,” Romano said. “We are not alone in the struggle to find our equilibrium in an ever-evolving health care environment that becomes more challenging almost by the day. Indeed, the health care industry as a whole continues to struggle with many negative pressures in a turbulent environment marked by lower reimbursements and a shift in the fundamental way we deliver care.”
CHI, Romano said, continues to highlight several key areas for increased efficiency and reduced costs: labor force, supply chains, administrative overhead, revenue cycles and pharmacy services.
“Significant progress has been made in key areas over the last few months,” he said, “and we expect that positive trend to continue as leaders across the enterprise work together to ensure a bright future for CHI.”
Olga Beck is the Fitch Ratings lead analyst who oversaw CHI’s most recent credit ratings downgrade. Beck said the nonprofit has not yet “turned the corner” regarding its financial statement, which led to the negative outlook.
“CHI will need to execute on its performance-improvement plan to reverse the current operating trend and improve profitability and liquidity to maintain the current BBB+ rating,” the Fitch Ratings report said. “Fitch believes that if the system’s strategies are successful, it should be able to deliver a sustainable [earnings before interest, tax, depreciation and amortization] of above 7 percent (as calculated by Fitch) within the next 12 months,” the report said. “Failure to improve operating performance to levels more consistent with BBB+ category peers and/or a further deterioration in balance sheet metrics will result in a downgrade.”
Beck said Fitch wasn’t pleased with CHI’s financial performance.
“2016 was still not where we hoped it would be,” she said. “CHI’s debt load was starting to look elevated compared to where its cash flow generation was.”
CHI has been more focused on streamlining its Kentucky and Texas operations, Beck said, and some losses were tied to one-time restructuring costs.
“If the stress is tempered, they maybe land at BBB+, but there could still be additional actions,” she said.
According to Fitch’s analysis, CHI has slightly more than 140 days cash on hand, a significant drop since 2014. As of last March, that liquidity is “materially weaker than 175 days at [fiscal year-end] 2015 and 198 days at FYE 2014.”
That decline is “very significant,” Beck said. “They’ve regained some of that by selling real estate, but again, that is an alarming cash decrease.”
According to Allan Roth, principal at local investment advisory and financial planning firm Wealth Logic, the best-case scenario for CHI is more costly construction projects as interest rates on its borrowed funds increase. Worst-case scenario, he says, is bankruptcy.
Roth said BBB ratings (BBB- specifically) are the lowest investment grade rating before bonds reach junk status.
“Clearly it’s bad news they’re being downgraded to barely above junk status,” he said. “It would be reasonable to conclude that cutting capital expenditures would help shore up financials.”
Beck said it is premature to discuss bankruptcy: “CHI has a lot of assets, some quite good. There’s lots that can be done before we get into bankruptcy and a below-investment grade doesn’t mean bankruptcy. … They can pay off debt year after year to bond holders with a low investment grade.”
But the proposed hospital at Fillmore and Centennial could hang in the balance. Roth said CHI’s financials make him “wonder if they’ll go through with it.”
While financing comes from CHI, capital improvement project decisions happen at the local level, Romano said.
Local officials say both the delayed St. Francis project and new hospital are still planned for the near future.
“Centura Health and our sponsor, CHI, are fully committed to the expansion of St. Francis Medical Center,” said Chris Valentine, marketing and communications director for Penrose-St. Francis Health Services. “We are on track to break ground later this spring and complete the approximately $100 million expansion in 2019. The new campus at Fillmore and Centennial is also still on track. For example, we are in the process of purchasing the 28-acre parcel of land that currently houses an asphalt plant on Fillmore.
“The completion of that sale will add to the 51-acre site we already own and create a parcel of land approximately 80 acres in size for future development of a world-class health care facility.”