Providence St. Joseph Health downgraded for third time in three weeks

Providence St. Joseph Health’s revenue bonds were downgraded to A2 from A1 by Moody’s Investors Service, marking the third downgrade from a rating agency within the past three weeks.

Moody’s on Monday also revised its rating outlook to negative on the $8.2 billion in debt it rates for the multi-state 52-hospital system headquartered in Renton, Washington, that has a second base of operations in Orange County, California.

Debt issued by St. Joseph Health System of California was also downgraded to A2 from A1 by Moody’s, as it’s part of Providence following a credit substitution in October 2016.

“The downgrade to A2 is driven by our expectation that margins will remain weak in 2023 with the majority of cash flow going to fund capital expenditures and that PSJH will not be able to materially reduce debt or increase liquidity over the near term,” Moody’s analysts Eugene Spielman and Susan Fitzgerald wrote.

“While a debt offering is possible in the coming months, management intends to not further increase the total amount of debt outstanding, using the debt offering to manage current maturities, fix out a portion of funds drawn on their line of credit, and lower the cost of capital,” analysts wrote.

Citing ongoing operational challenges and a $1.7 billion operating loss, Fitch Ratings on March 17 downgraded the long-term rating on the $7.4 billion in debt it rates to A from A-plus and maintained a negative outlook assigned a year ago.

S&P Global Ratings lowered its long-term rating to A from A-plus on March 21 on the taxable fixed-rate and tax-exempt bonds issued for the hospital system.

“The action reflects our view of PSJH’s steeper losses in 2022 that are primarily related to labor costs and labor availability, inflationary pressures, and dynamics within specific regional markets with a likely multiyear recovery,” wrote S&P analyst Suzie Desai.

After the hospital system completes a couple of major projects in 2023, Moody’s expects it will restrain capital spending until margin recovery occurs keeping debt and balance sheet metrics stable through 2023.

“Given current operating challenges, there is greater risk of underperforming targets” Moody’s wrote.

The negative outlook “reflects the magnitude of PSJH’s current operating challenges, and our expectation that while margins will improve in 2024, absolute cash flow will remain low and be only sufficient to cover capital expenditures,” Moody’s wrote.

The system’s strengths include a large, mostly contiguous service area in the Western U.S. spanning Alaska, Oregon, Montana, California and Washington, Moody’s wrote. It has a very large revenue base of more than $26 billion, leading market share in all of its markets, diversification and continuous investment of cash flows and an integrated care delivery system.

“Management is currently actively evaluating its current mix of offerings and products, and we expect progress to be made toward increased efficiencies and profitability,” Moody’s wrote.

A Providence spokesperson did not respond to a request for comment.

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