Bonds

Two rating agencies hit Ohio-based UC Health with two-notch downgrades and warned of the potential for further cuts citing operating losses that could lead to future covenant violations.  

Moody’s Investors Service dropped its rating on the system to Baa2 from A3 Feb. 7 and placed the rating under review for a further downgrade. S&P Global Ratings Feb. 14 lowered the rating to BBB-plus from A and assigned a negative outlook.

The University of Cincinnati-affiliated system, which issues debt through Hamilton County, Ohio, has about $647 million of outstanding debt.

“The rating action reflects our view of UC Health’s significantly escalating losses through fiscal 2022 and the three-month interim period ended Sept. 30, 2022, primarily a result of elevated labor costs, which produced negative cash flow,” said S&P analyst Concy Richards.

The losses have led to a rapid decline in liquidity which is expected to persist given “operating cashflow losses, large and necessary capital contributions to complete a master facility plan, and investment market volatility,” Moody’s said.

UC Health operates the flagship 724-licensed bed University of Cincinnati Medical Center, a 186-licensed bed West Chester Hospital, and other facilities that serve southwestern Ohio, northern Kentucky, and southeast Indiana.

A continuation of weak performance would result in a breach of the debt service coverage covenant in fiscal 2023, the first of a two-year requirement to meet the covenant in order to avoid an event of default.

A fiscal 2023 covenant violation would result in a consultant call-in. If the coverage covenant is violated for a second year this could result in an event of default under the master trust indenture.

“The negative outlook reflects our expectation that UC Health will continue to generate negative or below-median operating performance and weak cash flow, which could result in covenant violations and further balance sheet deterioration during the outlook period,” Richards said.

The system, which reported the downgrades in a Feb. 17 notice published on the Municipal Securities Rulemaking Board’s EMMA website, has a new chief executive officer and the management team has begun to implement some turnaround strategies as they complete a study on cost containment and opportunities for revenue growth.

The management team is working on short-term cost containment measures, including decreasing premium pay for staff and negotiating supply contracts and is pursuing additional revenue from pharmacy operations and Federal Emergency Management Agency support.

The turnaround faces near-term obstacles as labor struggles, particularly with nursing staff, and supply cost inflation are expected to weigh on the entire not-for-profit healthcare sector in the near term.

“Although the process is underway, its effects will likely not return the hospital to profitability in the outlook period, according to management,” S&P said.

Moody’s said it review of the turnaround plans will focus on the execution and durability of improvement plans and liquidity preservation.  

The system benefits from a market position bolstered by its role as the only academic medical center in the Cincinnati area and affiliation with the University of Cincinnati.

Like many other major hospitals and systems stung early on by the COVID-19 pandemic service limitations, UC Health saw improved fiscal 2021 results with the help of provider relief funding and a pickup in volumes. Results worsened in 2022 amid rising inflation, a nursing shortage, and volume shifts.

The system’s capital plans also pose strains in the near term.

“We anticipate continued operational pressure, particularly as UC Health brings a large expansion project on line,” S&P said.

The system launched a 10-year strategic capital assessment plan in 2019 with plans to spend $274.5 million on projects that include a new emergency department and tower and a surgery building at its flagship campus. The project broke ground in 2021 and once open next year is expected to improve profitability.

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