Standard & Poor Downgrades Catholic Health Initiatives Bond Rating.

Operating losses recalculated as greater than reported.

[See also Addenda of Dec 19 & 20 below]

Perhaps it was predictable, but Standard & Poor’s bond rating service downgraded its rating of Catholic Health Initiatives from A+ to A with a negative outlook based on large and unexpected losses in first quarter FY 2015, and an inability to meet the financial targets needed to deal with last year’s losses. The downgrade effects the $7 Billion of existing CHI debt for which Kentucky’s operations are also on the hook. CHI pointed to challenges in a few of its markets (particularly Kentucky) investments in capabilities, and costs in implementing computerized medical record systems.

CHI’s own “unaudited” financial report declared a $134.7 Million operating loss, but S&P recalculated this to $641 Million. Expenses were up 11% while revenues grew only by 8%. As reported by Modern Healthcare, S&P’s analyst predicted that plans by Catholic Health Initiatives to turn around its operations likely won’t be enough to avoid losses for fiscal 2015 based in part on poor performance last year— “It’s just a big hole to dig out of… They missed on their targets last year. We didn’t feel like there was a strong track record to show they will do well.”

I admitted in my own report on CHI’s losses that I had little expertise in interpreting complex financial reports, but I was quite surprised that the experts at S&P would look at the same numbers and come up with such a vastly different bottom line. I cannot explain the difference. The report itself sells for $500 which is well beyond my own bottom line.

 Who is on the hook for default?
CHI itself posted a notice of the change in its bond rating along with a list of 48 different outstanding bond issues. Of these, 8 were issued under the authority of either Louisville/Jefferson County Metro Government, or the the Kentucky Economic Development Finance Authority to the tune of $674.6 Million. Six of these were issued after the partnership of CHI with UofL became active, or at a time these governmental agencies were aware of UofL’s plans. No wonder both state and local government leaders were present as advocates at the announcement of the partnership. The timing of these bond issues makes me wonder if the bonds were issued in support of UofL’s intended or perhaps presupposed merger, or simply in support of Jewish and St. Mary’s Hospitals which were having problems at the time. Or did CHI simply assume responsibility for bonds issued under different names or titles?

This seems scary to me? Is Kentucky underwriting CHI’s expansion efforts? Do I have a right to be nervous? Who can fill us in on the details of the bond issues, or inform us the extent to which Kentucky taxpayers or the University system will have to pay for any defaults? I have in mind the extra tax dollars going to pay for Louisville’s downtown arena that were said to be only a remote, just-in-case possibility— more public dollars for essentially private interests.

Not good news by any measure.
This must be disappointing news for KentuckyOne Health, CHI’s operating arm in Kentucky, and for the University of Louisville which transplanted itself to KentuckyOne at the hip and expected huge infusions of cash for its academic and commercial enterprises. CHI has been on a buying and acquisition binge over the past few years. What remains to be seen is if it can successfully consolidate and streamline a disparate constellation of facilities while simultaneously adding the insurance business it desires; or whether it is inflating a healthcare bubble that will eventually burst. Despite attempts to put on a brave face, the outcome is uncertain at best.

Help me make any corrections, and add your expertise.

Peter Hasselbacher, MD
President, KHPI
Emeritus Professor, UofL
17 Dec 2014

3 thoughts on “Standard & Poor Downgrades Catholic Health Initiatives Bond Rating.”

  1. Fitch also adjusts its outlook for CHI.
    Fitch, a second major bond-rating organization released its own evaluation of CHI last week. It affirmed its own current proprietary rating of A+ but revised its outlook to negative. Nonetheless, its analysis was essentially the same as that of Standard & Poor. The negative outlook was “effected heavily” by losses in certain markets—i.e, Kentucky. Fitch had access to numbers for the first 4 months of the current year (through October) and noted further loss of profitability. The company has had “continued challenges in turning around core operating performance, resulting in large variances from budgeted results.”

    With respect to Kentucky: “Management’s current priority involves developing stronger partnership with the University of Louisville, stabilizing operations, building out the KentuckyOne medical group, and further developing its clinically integrated network. Operations appear to be on a turnaround track with positive operating EBITDA margins in the fiscal 2015 interim period compared to losses in prior years.” Much is riding on the success of the partnership with the University. At ground zero here in Louisville we are still waiting for that promise to bear edible fruit.

    An report by Melanie Evans in Modern Healthcare also provides worthwhile analysis and Kentucky-specific comments from CHI. Dean Swindle of CHI announced the hiring of a new chief financial officer for Kentucky, and noted : “Everything was difficult in Kentucky last year.” That’s for sure!

  2. I had a chance to read the full S&P credit report for Catholic Health Initiatives. I cannot claim to be any smarter about reading complex financial reports, but some of the explanatory comments were helpful in understanding our situation in Kentucky.

    S&P did in fact re-categorize some of CHIs numbers to come up with the $641 million operating loss in part by including what CHI was calling “restructuring” costs in operations. [A determination still above my pay grade!] Improvement was expected due to integration efforts, but performance in Kentucky was “notably worse” despite what S&P said was a workforce reduction of 700 people. Reasons offered for hampered financial performance in FY2014 are the same as for the previous year— a combination of lower patient volumes, issues of revenue collection, investment in physicians and IT (electronic medical record), and management turnover.

    CHI received a negative outlook reflecting “the risk that CHI’s extensive operating improvement plans will not result in sufficient improvement to sustain the ‘A’ rating.” Although some improvement is anticipated, S&P expects that there will be another operating loss in FY2015. If this loss is greater than $100 million to $200 million, “we will consider a lower rating.” S&P was also concerned with a “high debt burden and weak debt service coverage, which we view as inconsistent with the rating over the long-term,” and with “…the size of the operating gap and management’s recent record of missing financial targets.”

    There was no additional breakout of information by service region.

  3. Is there any way for University of Louisville Hospital to get get out from under Ky. One? Or, is this not desirous? Has the complexion of the Board of U of L Hospital been so immasculated that they cannot think for themselves?

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