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Analysis

HCR ManorCare Acquisition Dings ProMedica's Credit Rating

By John Commins  
   August 14, 2018

S&P Global Ratings lowers the credit rating after noting the significant debt burden ProMedica assumed to finance the acquisition that essentially doubled its size.

ProMedica Healthcare has taken a hit on its credit rating for the $3.3 billion acquisition of HCR ManorCare.

S&P Global Ratings on Tuesday lowered the health system's debt obligations to "BBB" from "A+" with a stable outlook.

ProMedica on July 26 acquired bankrupt HCR ManorCare in a deal that  made the 13-hospital, Toledo-based health system the 15th largest in the nation by revenue, with 70,000 employees in 30 states.

The joint venture with real estate investment trust WellTower was hailed as a "first-of-its-kind partnership" that gives not-for-profit ProMedica immediate scale in the fast-growing home health and post-acute care markets.

A WellTower subsidiary acquired HCR ManorCare's real estate and assets, and ProMedica bought 20% of the subsidiary, with which it also entered into long-term lease.

S&P Analyst Anne Cosgrove said "the multi-notch downgrade reflects the significant debt issuance of $1.15 billion and cash usage of $524 million to fund ProMedica's full acquisition of HCR ManorCare's operations but not most of the hard assets, as well as the 20% investment in the real estate joint venture with WellTower."

While the new debt load and lease "significantly pressures" ProMedica's projected debt burden, S&P notes that cash flow could be stronger with the acquisition, "and there are strategic opportunities for ProMedica to diversify revenues and grow outside of the immediate northwest Ohio Market."

However, there remains uncertainty around the post-acute care industry, which S&P notes "has experienced significant operating pressures, particularly about reimbursement and occupancy in recent years."   

"The stable outlook reflects our expectation that management will execute on its integration plan of HCR ManorCare into ProMedica effectively such that the organization maintains healthy cash flow that generates adequate coverage levels and unrestricted reserve metrics as projected," S&P said.

The bond rating agency left open the possibility of lowering the rating again over the two-year outlook period "if operating performance and cash flow fail to meet operating targets or materially deviate from expectations provided in management's combined projections."

S&P said a ratings upgrade was unlikely given the significant debt, the "sizeable" operating lease, and the use of cash to finance the deal.

"However, we could do so if ProMedica generates significantly increased operating cash flow and rebuilds overall unrestricted reserves to levels commensurate with a higher rating," S&P said.

"Integration success, achieving the acquisition's key strategic goals, and the ability to operate in the long-term care space will also be important factors in future upward rating potential," S&P said.

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.


KEY TAKEAWAYS

S&P says the downgrade reflects the 'significant debt' accrued by ProMedica to finance the deal.

The bond rating agency raised concerns about challenges facing the post-acute care sector.

On the upside, the acquisition has the potential to improve cash flow for the health system.


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