New York, January 18, 2023 -- Moody's Investors Service has downgraded the revenue bond ratings of Fairview Health Services (MN) to Baa1 from A3. The outlook is negative. Fairview Health Services (Fairview) has about $1.6 billion in total outstanding debt.
RATINGS RATIONALE
The downgrade to Baa1 reflects Moody's expectation that weak operating performance, which began prior to the pandemic but worsened in 2022, will be difficult to reverse, especially in light of heightened labor costs and soft inpatient volume trends. Other headwinds, including inflation and annual transfers to the University of Minnesota, will also constrain margins. Cash measures have moderated due to operating as well as investment losses and will be maintained at lower than previously anticipated levels, providing less of an offset to weak operations. This action does not incorporate a proposed merger with Sanford Health and does not consider the University's interest in re-purchasing the East Bank campus that it sold to Fairview in 1997, as well as purchasing the facilities on the West Bank that the University has never owned. One or both of these transactions, if finalized, would result in meaningful changes to Fairview's overall profile.
The Baa1 rating also reflects Fairview's solid market position, good scale and long-standing role as the academic health system for the University of Minnesota, providing distinction in a highly competitive market. Fairview will continue to see meaningful income from its more profitable specialty pharmacy, which offers service line diversification but provides some uncertainty in light of scrutiny of drug pricing and the 340B program. Although debt to cash flow will remain relatively high given depressed cash flow, cash to debt is adequate at the Baa1 even at reduced levels.
RATING OUTLOOK
The negative outlook reflects protracted pre-pandemic operating challenges, further exacerbated by higher than expected labor expenses. This will likely result in very weak operating cash flow margins for the foreseeable future. If Fairview is not able to maintain forecasted cash metrics, albeit at lower levels, or if operating performance does not exceed forecasts, the rating could be downgraded further. This would raise the risk of breaching rating triggers in bank agreements.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
- Material sustained improvement in operating cash flow margins, aided by cost and revenue initiatives
- Improvement in absolute cash and days cash
- Lower leverage as measured by debt to cash flow and cash to debt
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
- Inability to exceed forecasted improvement in operating cash flow margins and reduction in debt to cash flow
- Lower than anticipated days cash or cash to debt metrics
- Reduction in 340B net income related to program changes or constraints on specialty drug pricing
- Further reduction in headroom related to bank covenants, including rating triggers and days cash
LEGAL SECURITY
All bonds are secured by an unrestricted receivables pledge from the System's Obligated Group, which includes legacy HealthEast facilities. Obligated Group members account for about 84% of total system revenue at fiscal year 2021.
PROFILE
Fairview Health Services has substantial scope in the Twin Cities metro area extending into northern Minnesota and western Wisconsin. Total combined operating revenue for fiscal 2021 was about $6.4 billion. The system owns and operates ten hospitals, including the University of Minnesota Medical Center (UMMC, which includes the Masonic Children's Hospital), and also operates over 80 primary and specialty care clinics, seven ambulatory surgery centers, over 35 retail and specialty pharmacies, as well as senior care housing and long-term care facilities and medical transportation. Fairview sold its PreferredOne health plan to UnitedHealthcare in August 2021. On November 15, 2022, Fairview and Sanford Healthcare, based in North Dakota, announced a non-binding letter of intent to merge. On January 12, 2023, the University of Minnesota announced its interest in re-purchasing the East Bank campus that it sold to Fairview in 1997, as well as purchasing the facilities on the West Bank that the University has never owned, including Masonic Children's Hospital.
METHODOLOGY
The principal methodology used in these ratings was Not-For-Profit Healthcare published in December 2018 and available at https://ratings.moodys.com/api/rmc-documents/70886. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
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Diana Lee
Lead Analyst
PF Healthcare
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