Providence/Hogg separation sparks possible downgrade
Providence could be downgraded if it doesn’t explain its plans for the entire ship following its separation from Hogg this month.
Two of the three major credit rating agencies, Fitch Ratings and S&P Global Ratings, have placed the 52-hospital, $26 billion health care system on credit watch, with negative impact. The alert was designed to be temporary, primarily to let investors know there was something wrong with the institutions.
“What we need to know is: What about Providence now? Where are you going from here?” said Kevin Holoran, a senior director at Fitch. He said Fitch had arranged for a meeting with Providence executives.
It’s not just Renton, Washington-based Providence that is losing a vital source of cash and revenue to Hogg, a small Southern California-based health system that Sued to unwind its 2013 merger with Providence. The nonprofit Providence has lost hundreds of millions of dollars in operations in recent years, largely because of the COVID-19 pandemic. The health system declined to comment.
Providence posted an operating loss of more than $300 million in 2020, a loss of 1.2%. That even includes $957 million in federal COVID-19 relief grants. The health system cited an “unprecedented” drop in numbers and “significant” costs to support caregivers and serve patients, including increased spending on labor, personal protective equipment and medicines.
That loss grew to more than $400 million in the first nine months of 2021, the latest period for which financial results were available. That’s a bigger 2% loss margin.
Providence explained in its 2021 report that it experienced two separate COVID-19 surges in the first nine months of the year. While patient net income rose 11% from a year earlier, the increased hospital admissions, emergency department and outpatient visits corresponded with higher labor costs and more frequent use of expensive traveling nurses. Providence also noted that the $170 million in federal stimulus payments it confirmed during the period was significantly lower than the $682 million it confirmed during the same period in 2020.
Hogg accounts for 6% of Providence’s operating income and 17% of its unrestricted cash and investments, Fitch said in a report announcing its rating watch negative on Friday. Fitch wants to understand the mechanics of separation, which is Hoag’s Legal Efforts Beginning in 2020 Dissolution merger. For example, Holloran said he doesn’t know whether the outstanding debt goes to Providence or Hogg, or how much cash goes to Hogg.
S&P says In its January 19 report Because of Hogg’s separation, it puts Providence in the negative light of CreditWatch. While Hogg is much smaller than Providence, the breakup could put Providence financially under pressure, the report said.
“It’s historically been weaker, and the balance sheet has helped support that image as they’ve been investing and weathering COVID,” said S&P credit analyst Suzie Desai. “It’s just Reflects a significant amount of reserves leaving the system. Are the current ratings still where they are today?”
Fitch’s report said it hoped to resolve the issue by the end of the first quarter. Desai said S&P aims to resolve the designation within 90 days. Both agencies said that if the downgrade results, it may not be more than one notch.
For its part, Moody’s Investors Service has not made any rating changes since September when it rated Providence bonds at Aa3 with a stable outlook.
On the bright side, Fitch wrote that Providence enjoys “excellent” market positions in its seven-state key markets, all of which have solid economic and population growth.
Providence has been working to position itself as a leader in driving revenue diversification.Chief Executive Officer Dr. Rod Hochman Announced in early 2020 His system aims to generate $1 billion in revenue by 2022 from sources other than patient care — with an EBITDA margin of at least 30%. The system did not say on Friday whether that had been achieved.
Regardless, Providence has announced a number of businesses outside of healthcare in recent years. It acquired Bluetree, a consulting firm, Dedicated to managing Epic Electronic health record system. It launched the for-profit Ayin Population Health Management Corporation.
“They did it very efficiently, and they were very innovative,” Holoran said. “I’m always surprised and impressed when I see what they’ve been doing.”