S&P Global Ratings cut its debt rating for Catholic Health Initiatives again yesterday. CHI is the financial arm of Centura’s Penrose-St. Francis Health Services in Colorado Springs, and the Englewood-based nonprofit is expected to fund Centura’s planned Colorado Springs projects, including a $100 million St. Francis expansion and a hospital expected to cost as much as $500 million at Fillmore Street and Centennial Boulevard.

The cut from A- to BBB+ came on the heels of a downgrade last summer by rating agencies S&P, Fitch Ratings and Moody’s. CHI began 2017 with a negative outlook, which has been upgraded to stable, meaning further downgrades are not immediately expected.

Fitch’s negative forecast going into 2017 was due to its long-term rating on approximately $6 billion of outstanding debt. Fitch also downgraded the short-term rating on $978 million of debt additionally supported by CHI’s self-liquidity to F2 from F1+.  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 pointed to the possibility of yesterday’s downgrade.

According to an article that appeared in Modern Healthcare, it could take several years, with current production and strategies, before CHI’s credit rating is increased.

“Englewood, Colo.-based CHI, which is in affiliation talks with Dignity Health, responded Thursday that its turnaround plan is gaining traction as evidenced by improved earnings in its second quarter ended Dec. 31,” according to the Modern Healthcare article. “Moreover, its ‘alignment’ discussions with San Francisco-based Dignity continue, even as it works its turnaround plan, CHI said in a statement. A merger between the two companies would create the nation’s largest not-for-profit hospital chain with 142 hospitals combined and annual revenue of more than $26 billion.”

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, earlier this year.

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“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,” Romano said in January. “We believe the performance-improvement plan will yield positive results and significant progress over the next six months.”

Romano said earlier this year that 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.”

Romano said in January that CHI 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.”

According to Modern Healthcare, “CHI narrowed its operating losses in its fiscal second quarter. It posted operating losses of $75.6 million before charges in the quarter compared with operating losses of $93.7 million in the year-earlier quarter. Revenue increased in the quarter to $4.2 billion from $4 billion in the year-ago period.”

 

Update: Michael Romano, national director of media relations for CHI, provided the following statement—

“While we are disappointed by this decision, Standard & Poor’s upgraded CHI’s long-term outlook from negative to stable, a positive action that reflects our financial progress in the second quarter of the 2017 fiscal year and underscores the credit agency’s faith in the organization’s strategic direction and performance-improvement plan.

‘”The stable outlook,’ Standard & Poor’s said in its report, ‘reflects our view that CHI’s overall financial performance should start to improve steadily from the quarterly performance demonstrated in the second quarter of fiscal 2017.’

“CHI, which retains its investment-grade ratings from Standard & Poor’s and the other two major rating agencies, demonstrated substantial headway in the second quarter of the current fiscal year. A rigorous, comprehensive performance-improvement plan is expected to yield continued progress through the end of the current fiscal year on June 30.

“In its report Standard & Poor’s characterized recent performance as ‘meaningful improvement’ over prior quarters, adding that management changes in the last several months have ‘added discipline to the turnaround program.’ It also noted that ‘CHI’s size, scale and revenue diversity remain exceptionally strong and help support the rating at the high end of the BBB category and the stable outlook as well.’

“Periodic ratings downgrades are not unusual in the U.S. health care industry, which continues to struggle with many negative pressures in a turbulent environment marked by lower reimbursements and a shift in the fundamental way care is delivered. This highly volatile situation is complicated by continued uncertainty for the near future, including questions about wholesale changes in the Affordable Care Act.

“CHI has considerable strengths, including almost $16 billion in annual revenue in the 2016 fiscal year, and a solid balance sheet with total assets of approximately $22.7 billion. We expect a strengthening of our financial performance – and a strengthening of our credit profile.”

Penrose-St. Francis Health Services stated this year that the ratings downgrade would not affect expansion plans at it St. Francis Medical Center location or the new hospital planned for Centennial Boulevard and Fillmore Street.