A top credit rating agency has downgraded the University of Arizona Medical Center’s bond rating due to weak financial performance.
Moody’s Investors Service downgraded the bond rating of the UA Medical Center’s parent company, University Medical Center Corp., on Tuesday, even taking into account an anticipated sale to financially strong Banner Health.
The downgrade went from Baa1 — a medium grade with a moderate credit risk — to Baa2, which is one level lower.
Baa2 is ninth highest on the company’s 21-level ratings scale, though it is second-lowest Moody’s investment rating. Anything below investment rating is considered to involve a substantial credit risk.
The credit rating agency based its rating on University Medical Center Corp.’s $367 million in fixed-rate debt. It also predicted a negative outlook for the local health company.
“Although we expect significant operating improvement in FY 2015, we believe that performance will still remain weak relative to peer organizations,” the July 15 report says.
An earlier Moody’s report from June 10 says it placed University Medical Center Corp. under review following the receipt of nine-month interim financials for its 2014 fiscal year, which ended June 30. The report says the nonprofit company’s financials include “a large operating loss and very low operating cash flow margin.”
Other factors that contributed to the downgrade:
- Days of cash on hand has weakened over the last few years.
- Despite a reduction in the number of patients with no insurance, the UA Medical Center’s payer mix remains challenging with a high percentage of Medicaid and patients with high deductible plans.
University Medical Center Corp. includes two hospitals on separate campuses of the UA Medical Center, which is Tucson’s only academic medical center.
Officials have said the UA Medical Center was impacted by a much-needed $115 million conversion to an electronic medical records system and a lower than expected reduction in uncompensated care.
The UA Health Network is the parent organization that was created in 2010 through a merger between University Medical Center Corp. and University Physicians Healthcare. It is in the midst of negotiating a sale to Banner Health. Under terms of the deal, Banner Health would acquire the UA Health Network and form an affiliation with the UA College of Medicine.
“This is not new information for us, nor does it affect our decision to move forward,” said Bill Byron, vice president of public relations for Phoenix-based Banner Health, reacting to the downgrade.
Moody’s doesn’t rate Banner Health. Fitch Ratings, another major agency, gives it low credit risk of AA-.
The University Medical Center Corp. downgrade was not a surprise given the organization’s financial performance over the last year, said Misty Hansen, chief financial officer for the UA Health Network.
“It is disappointing but not significant for us at this point and time,” she said. “It is just a reaction to the year we had. It does not mean we are high risk.”
Hansen said the company has had ratings downgrades in the past. It was downgraded from A3 to Baa1 in 2005 and was able to “continue to serve the community without issue,” she said.
Hansen stressed that all of its bond debt is borrowed at a fixed rate, so a downgrade will not affect the interest rates it pays.
The Moody’s report says the Baa2 rating incorporates an expectation the Banner acquisition will occur by the end of 2014 on terms substantially similar to an existing draft agreement between the two entities.
“If a definitive agreement is not reached in a relatively short time period, or if it appears that Banner will allow UMCC’s debt to remain outstanding, we may downgrade the rating,” the report says.
Banner’s market share in Arizona in 2013 is projected at 31.2 percent with Banner Casa Grande included. The UA Health Network in 2013 had 4.4 percent. Banner Health officials project 35.6 percent market share in Arizona based on current data.
The UA Medical Center rating is unlikely to be upgraded in the near term, last week’s report says. Longer term, the rating could be upgraded if uncompensated care costs decrease significantly and operating performance is sustained at higher levels.
The report says an additional factor that would contribute to an upgrade is a significantly improved liquidity profile.
Following the notice of review on the University Medical Center Corp. debt June 10, Moody’s issued a report that said the UA Medical Center’s finances could affect the UA, the university it’s affiliated with.
“As medical education and research are important components of UA’s market and credit profile, UMCC’s weaker performance could impact the university over time through reduced financial transfers or a weakened position when competing for top-tier faculty and researchers,” the Moody’s report says.
The UA’s rating could improve if UMCC has a stronger operating performance, the Moody’s report says. Conversely, it could have downward pressure with “sustained deterioration of the operating performance, declines in liquidity, or negative impacts due to UMCC’s financial pressures.”