S&P Downgrades ProMedica in Wake of ManorCare-Welltower Deal

After warning last month that a credit downgrade was likely, Standard & Poor’s this week lowered its long-term credit rating for non-profit health care provider ProMedica by multiple levels.

The Toledo, Ohio-based hospital and skilled nursing chain now sits at BBB, down from the A+ rating ProMedica had maintained ahead of its blockbuster deal to acquire struggling nursing chain HCR ManorCare.

S&P specifically pointed to its lukewarm feelings on the skilled nursing industry in justifying the downgrade, which also comes with a “stable” outlook.

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“HCR ManorCare provides post-acute care services — an industry that has experienced significant operating pressures, particularly about reimbursement and occupancy, in recent years,” the ratings agency wrote in its Tuesday notice announcing the move.

S&P indicated that a multi-notch fall was likely for ProMedica’s credit rating in the immediate wake of the mega-deal, which also saw the operator form a joint venture with real estate investment trust (REIT) Welltower Inc. (NYSE: WELL) to own the properties leased to HCR ManorCare.

Fellow ratings agency Moody’s also placed ProMedica’s A1 rating under review for a possible downgrade soon after the transaction closed on July 26.

In addition to a bearish outlook on the overall skilled nursing industry, S&P found fault with the way ProMedica funded the deal.

“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,” S&P Global Ratings credit analyst Anne Cosgrove wrote in the announcement.

The Welltower-ProMedica-ManorCare deal marked the end of a stormy period for several major players in the skilled nursing space. Former ManorCare landlord Quality Care Properties had been locked in an extended battle with its tenant over missed rent payments, which eventually sent ManorCare into Chapter 11 bankruptcy protection. QCP had initially indicated that it would take over ManorCare’s operations, giving up its status as a publicly traded REIT, but Welltower and ProMedica executives stepped in with their alternate plan, valued at $4.4 billion.

By purchasing ManorCare, ProMedica rapidly expanded from a regional hospital chain to a national health care operator with 70,000 employees across 30 states, making it one of the top 15 non-profit health systems in the country.

“We are focused on tearing down the walls between care delivery channels to provide simpler navigation across the care continuum, along with greater value,” ProMedica CEO Randy Oostra said a statement after the deal closed. “Further, we see a tremendous opportunity to engage ProMedica’s nationally recognized social determinants of health work to benefit seniors across the communities we serve.”

Welltower executives frequently cited ProMedica’s solid credit rating when describing the deal to investors and analysts, acknowledging that the REIT likely wouldn’t have made such an aggressive skilled nursing play without the backing of such a financially sound partner.

“If you’re going to look at this as a SNF deal, you’re missing the whole underpinning of why we’re doing this,” Welltower CEO Tom DeRosa told Skilled Nursing News back in April, when news of the transaction first broke. “We would never have bought this real estate from QCP except in a joint venture, as we’ve structured it, with an A-rated health system that will be our operating partner as well as our real estate partner.”

S&P did have some words of optimism for ProMedica’s long-term outlook, noting that it expects the company’s management to effectively incorporate its ManorCare assets into the overall network over the coming years.

“Cash flow at the system could be stronger following the acquisition, and there are strategic opportunities for ProMedica to diversify revenues and grow outside of the immediate northwest Ohio market,” the agency wrote.

Written by Alex Spanko

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