Fitch Downgrades ProMedica, But Cites ManorCare Nursing Home Business as Bright Spot

Major hospital system ProMedica received another downgrade to its credit rating, but its HCR ManorCare nursing home arm remains a bright spot amid stresses elsewhere, according to Fitch Ratings.

The ratings agency late Thursday announced a downgrade of the non-profit’s issuer default rating from BBB to BBB-, while also raising its outlook from negative to stable.

As with many other health care companies, continued uncertainty around the coronavirus crisis was the main driver of the downgrade for the Toledo, Ohio-based ProMedica.

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Any concerns about the health system giant were unrelated, however, to the performance of its HCR ManorCare business, which ProMedica acquired in a blockbuster 2018 transaction; that deal also saw the company enter into a 20-80 joint venture arrangement with Welltower Inc. (NYSE: WELL) to own the associated real estate.

All in, the transaction’s value was estimated at $4.4 billion.

While ProMedica had suffered from struggles with its Paramount insurance arm, Fitch praised the company’s efforts to alleviate those losses by strategically exiting the managed Medicaid business in certain Ohio markets.

“While Paramount is seeing signs of financial relief and ProMedica’s long-term care division (HCR ManorCare) continues to financially perform as expected, ProMedica’s hospital division has suffered a negative impact from the coronavirus pandemic — resulting in operational losses due to the postponement of non-emergent services, combined with some heighted [sic] expenses,” Fitch observed in its ratings notice.

The COVID-19 headwinds served to compound on the earlier Paramount strain, Fitch noted, though the ratings agency did express optimism about the operator’s overall strategy.

“In Fitch’s opinion the model set out by ProMedica -— having an insurance (payor) division, an acute care (hospital) division, and a post-acute (long term care) division — remains fundamentally sound, however the road to generating expected financial results is longer and a more challenging than originally anticipated,” the agency concluded.

At the time of the 2018 transaction, leaders from Welltower and ProMedica positioned the hospital system as a stable, investment-grade home for the troubled ManorCare, which had recently gone through bankruptcy protection after struggling financially under the previous ownership of private equity giant The Carlyle Group.

Though Fitch’s July downgrade still keeps the company’s debt in investment-grade territory, the agency made clear that the ManorCare chain is a financial anchor for ProMedica.

In discussing potential ways for the health system to boost its financial footing, Fitch noted that ProMedica has the ability to sell up to 49% of its share of the ManorCare real estate, while also offloading part or all of its operational stake — a safety valve that Fitch described as “somewhat unique to ProMedica.”

But Fitch emphasized that such a move would come at the expense of a strong ongoing business line.

“Fitch considers the monetization of assets or the sale of operations as an extreme situation, as HCR ManorCare’s performance is accretive to the larger ProMedica organization,” the agency concluded.

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