Bonds

S&P revises University of Chicago Medical Center outlook to negative

S&P Global Ratings has revised the outlook on bonds issued for the University of Chicago Medical Center to negative from stable. 

The rating agency affirmed its AA-minus long-term rating and underlying rating on the bonds, but said it could lower the rating if UCM fails to raise days’ cash on hand to about 200 days, to increase maximum annual debt service coverage to levels in line with the rating and to produce “meaningfully stronger” operating margins. 

The debt was issued through the Illinois Finance Authority.

The University of Chicago hospital complex. S&P Global Ratings lowered the outlook on University of Chicago Medicine to negative.

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“The outlook revision reflects the continued trend of decreasing profitability and maximum annual debt service coverage, along with days’ cash on hand and unrestricted reserves to long-term debt that are weak for the rating,” S&P director Marc Bertrand said in a statement.

Bertrand and S&P Managing Director and Sector Lead Suzie Desai told The Bond Buyer by email that those declines are linked to staffing, but also to increasing supplies and pharmaceuticals costs. 

And they noted that UCM took on some one-time expenses when it acquired a majority interest in AdventHealth’s four hospitals in the Chicago suburbs at the beginning of 2023.

“Days’ cash on hand has been affected mainly by the growing expense base as it relates to both growing expenses tied to inflation and the new joint venture with AdventHealth, which expanded the expense base through consolidation of those entities, as well as limited growth in unrestricted reserves and cash,” they said.

According to data from Merritt Research Services, an InvestorTools company, UCM’s debt service coverage fell in 2023 to its lowest level since 2001. The nonprofit health system’s adjusted operating margin dropped to 1.33% last year, down from a high of 4.27% in 2021.

Its days’ cash on hand fell to 146 as of June 30, 2023, down from a peak of 230.3 when UCM was still receiving COVID-19 relief funds — the lowest it’s been since 2000, when it was 112.

That’s compared to 217.6 days for the East North Central region (composed of Illinois, Wisconsin, Indiana, Ohio and Michigan), which also experienced a drop, to the lowest level the region has seen since 2011.  

In 2024, UCM’s operating margins remain under pressure. While the cash flow is relatively strong, it’s seen pandemic relief funds taper off only to be left with higher costs, according to Merritt data.

Its liability burden is also a factor. In 2023, there was a jump in total debt outstanding, to $1.292 billion compared with $935.7 million in 2022, after UCM borrowed $375 million through a Series 2022 revenue bonds deal in late 2022 to finance the majority stake in AdventHealth’s local hospitals.

Those bonds were assigned a AA-minus rating by both Fitch Ratings and S&P. Fitch maintains the AA-minus rating, with a stable outlook.

And while the same period brought an increase in revenue to $3 billion from the previous year’s $2.4 billion, UCM’s expenses went up even more – to $3.6 billion from $2.8 billion.

S&P’s Bertrand and Desai noted that UCM “has initiated a variety of improvement areas, including better expense controls, improvement of length of stay for increased efficiency, continuing to capture more volume (which they have been doing already) and generating better performance at the other recently acquired affiliate, Ingalls Memorial Hospital.”

The improved performance at the latter is partly due to additional Medicaid funding from the state, they added.

The health system could see its outlook revised back to stable if it produces “sustained operational improvements” in tandem with a stronger balance sheet, S&P said. 

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