Bond raters cited the COVID-19 pandemic and ongoing structural issues as key drivers for the slight downgrade.
Sutter Health's stellar credit portfolio lost a bit of its luster when two bond rating agencies downgraded the health system's long-term rating from A+ to A, each with a stable outlook.
Fitch's Investor Services and S&P Global Ratings both cited the COVID-19 pandemic and ongoing structural issues as key drivers for the downgrade.
"The rating action reflects our view of Sutter's weakened performance in 2020, largely as a result of COVID-19 but also a result of an underlying operating structure that will likely take a couple of years to fully address, with the post-pandemic environment and Sutter's broader operating environment in Northern California potentially complicating a sizable and multiyear turnaround," S&P Global Ratings credit analyst Suzie Desai said.
Fitch noted that Sutter Health's challenged extended back "even before the pandemic generated material operating losses in 2020."
"Sutter Health's softening margins in recent years revealed the challenges of operating in the complex and competitive Northern California market," Fitch said. "Fitch believes that management is evaluating significant strategies and actions to sharply reverse recent financial results, but ongoing pressures may limit Sutter's ability to sustainably recover to operating EBITDA margins much above the 7% level."
Like virtually every other health system in the United States, Sutter Health saw steep margin declines in 2020 during the pandemic owing to revenue loss from volume drops and the high expenses. However, the bond raters noted that that decline was offset by about $800 million in federal stimulus money. Sutter has also attempted to offset revenue losses by consolidating services, divesting "non-core assets" and layoffs.
"Management is also working on a longer-term forecast for business growth and rationalizing costs to support the growth. Fitch expects that ultimately Sutter Health's cash flow margins should rebound to a level of around 7%, most likely after 2021," Fitch said.
Sutter is also expected to pay a $575 million in Q3 of 2021 in two consolidated antitrust lawsuits. The health system recorded the expense in its 2019 financials.
Fitch noted that Sutter Health's "overall environmental risk" was "elevated" but manageable because of the health system's location in Northern California, an area with a history of earthquakes and wildfires.
"In our view, Sutter has demonstrated an ability to use its diversity of facilities to
execute facility plans to manage environmental challenges effectively," Fitch said.
“The rating action reflects our view of Sutter's weakened performance in 2020, largely as a result of COVID-19 but also a result of an underlying operating structure that will likely take a couple of years to fully address, with the post-pandemic environment and Sutter's broader operating environment in Northern California potentially complicating a sizable and multiyear turnaround.”
Suzie Desai, S&P Global Ratings.
John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.
Photo credit: Los Angeles, California, USA - 26 March 2020: Sutter Health website page. Sutterhealth.org logo on display screen, Illustrative Editorial. By Postmodern Studio /Shutterstock
KEY TAKEAWAYS
Sutter Health saw steep margin declines in 2020 during the pandemic owing to revenue loss from volume drops and the higher expenses.
However, the bond raters noted that that decline was offset by about $800 million in federal stimulus money.
Sutter has also attempted to offset revenue losses by consolidating services, divesting "non-core assets" and layoffs.