Bonds

Fitch downgrades Pennsylvania’s Tower Health Systems

Fitch Ratings downgraded Pennsylvania’s Tower Health Systems after the non-profit regional healthcare system reported continued budgetary shortfalls through fiscal 2023.

The rating agency on Tuesday lowered Tower’s long-term issuer rating one-notch to CCC-minus from CCC after its unaudited financial report for fiscal 2023 showed it incurred operating losses of $137 million on the year, a negative 7.4% operating margin from fiscal 2022’s figures.

Tower has faced annual deficits for six years running that’s greatly weakened reserves and limited liquidity, Fitch said, presenting challenges for hospital managers seeking to turn around the downward trajectory.

Phoenixville Hospital is one of five community hospitals Tower Health acquired from Community Health Systems in 2017.

Tower Health

Despite net revenue improvements in fiscal 2022 and 2023 associated with the closure or sale of several hospitals along with other efforts to address financial issues, Fitch said Tower still faced “notable” operational losses and uncertainty headed into the future.

Tower services an area of southeastern Pennsylvania with a population of 2.5 million and owns several hospitals and medical facilities anchored around its flagship 738-bed Reading Hospital in Reading. 

Before the economic upheaval brought on by the COVID-19 pandemic, Tower launched a multi-billion dollar bond-backed expansion that included the purchase of five hospitals from Community Health Systems funded by $591 million of health system revenue bonds sold through the Berks County Industrial Development Authority in 2017.

Over roughly the same period, however, its operational losses topped $1 billion, while the coverage ratio on its $1.6 billion of outstanding debt slid to 13.4% where it stands today.

Currently, the hospital operator only had 40 days of cash on hand, Fitch said.

“On a more positive note, the majority of operational losses occurred in the first three quarters of fiscal 2023, with a measure of improvement seen in the fourth quarter, which is encouraging for rating stabilization,” the analyts added.

The last time Tower came to the bond market for financing was in 2020 when it sold $264.5 million of fix-rated revenue bonds through the Berks County Municipal Authority in a negotiated deal managed by Citigroup Global Markets and co-managed by J.P. Morgan Securities and PNC Capital Markets with H2C Securities filling the role of municipal advisor.

After lowering Tower’s bond rating by two notches in March 2021, S&P Global downgraded it further, to B from BB-minus with a negative outlook, in February of this year.

The rating agency said the downgrade reflected significant revenue losses experienced by Tower as well as a steep decline in reserves the rating agency viewed as a large vulnerability.

“In addition, the rating action incorporates our view of cash-flow pressures that stem from elevated labor costs and management’s legacy inability to execute meaningful operational improvements and strategic priorities,” they added.

S&P said the negative outlook reflected “a one-in-three chance” they could lower the rating if management “is unable to stem the operating losses and execute on a plan to stabilize the organization, or if unrestricted reserves decline further.”

Moody’s Investors Service withdrew its bond rating for Tower due to a lack of sufficient information to support the maintenance of the rating in 2020.

They last assigned Towers a Baa2 bond rating of with a negative outlook in October 2019.

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