KentuckyOne Health parent firm's debt rating downgraded again; explores merger that would create largest not-for-profit chain

Flaget Memorial Hospital at Bardstown is part of the chain.

S&P Global Ratings has cut its debt rating for Catholic Health Initiatives, a nonprofit with KentuckyOne Health hospitals in Louisville, Lexington, Bardstown, Berea, Campbellsville, London, Martin, Mount Sterling, Nicholasville and Shelbyville.

S&P, former Standard & Poor's, dropped CHI's rating from A-minus to BBB-plus Thursday. That is just two spots above a junk-bond rating. However, the BBB-plus rating was upgraded from negative outlook to stable outlook, meaning no further downgrades were looming, Dave Barkholz reports for Modern Healthcare. Fitch Ratings also downgraded the company's debt rating in July from A-plus to BBB-plus, he notes.

"While management's current turnaround plan has created an expectation for stabilization and modest improvement over the next 18 months, it is our opinion that it will take several years on the current financial improvement trajectory for CHI to return to a higher rating," S&P credit analyst Martin Arrick said in the downgrade report.

CHI said in a statement that it has "considerable strengths," including $16 billion in annual revenue, 103 hospitals across 22 states and a solid balance sheet, with assets of $22.7 billion. "We expect a strengthening of our financial performance – and a strengthening of our credit profile," CHI said.

Barkholz reports, "The system's turnaround plan is now being shepherded by interim operating chief Anthony Jones, a Los Angeles-based management consultant who replaced longtime COO Michael Rowan, who resigned in December."

CHI's debt is relatively high for a system of its size, Barkholz notes. The company's annual debt service, interest paid on its bonds and borrowing, is about $460 million on total debt of $9 billion, according to Barkholz.

CHI, which is in affiliation talks with Dignity Health, told Barkholz that its turnaround plan is gaining traction as evidenced by improved earnings in its second quarter, which ended Dec. 31.

Its "alignment" discussions with Dignity continue, even as it works its turnaround plan, Barkholz reports. A merger between the two companies would create the nation's largest not-for-profit hospital chain, with 142 hospitals combined and an annual revenue of more than $26 billion.

Dignity's overall debt is lower: $5.25 billion, he writes. However, it, too, has maximum debt service to carry: $408 million annually. The two companies are expected to decide whether to merge sometime this year.