Credit agency downgrades Butler Health rating to BBB
The bad news keeps coming for the recently merged Butler Health System.
Credit agency Fitch Ratings has downgraded the credit rating for the financially troubled hospital network from A to “BBB,” citing “deficit operating and excess losses.” Butler Health recently reported losses of $33.1 million for the nine-month period ending March 31.
A BBB rating indicates that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.
Butler Health System officially merged with Westmoreland County-based Excela Health at the start of the year. The combined operation now goes by the name Independence Health System. The two hospital networks still maintain separate financial records.
Another credit agency, Moody’s, downgraded Butler Health from Baa2 to Baa3 on May 16.
“Butler financial results through March suggest that its operating challenges have not abated and are exacerbated by inflationary pressures on labor and supplies, but also patient volumes which have yet to rebound to pre-pandemic levels,” the Fitch report stated.
Even before the merger, Butler Health System was under deep financial pressure due in large part to labor and supply shortages in the medical field, as well as rampant inflation driving prices through the roof. For fiscal year 2022, the health system suffered an operating loss of $14.6 million.
In February, the newly merged health system laid off 13 manager-level executives to reduce expenses.
Fitch previously downgraded Butler Health to “A” in late February, shortly after the hospital network breached its loan covenant with North Carolina-based Truist Bank. Butler Health is in negotiations with Truist to have the covenant waived.
If this doesn’t happen, Butler Health System risks having all of its existing debt obligations accelerated at the bank’s discretion.
According to Fitch, Butler Health has approximately $137 million worth of unrestricted cash and investments, which equates to roughly 104 days worth of cash on hand. One of the obligations of Butler’s debt service covenant is to maintain at least 90 days worth of cash on hand.
Fitch’s “rating watch” for the health system still is at negative, implying that the agency anticipates lowering Butler Health’s rating yet again in the near future. However, the report on the downgrade states that Butler’s credit rating could climb back up if it manages to break even (or better) on operating margin.
“Assuming the covenant violations are waived and operational improvement initiatives are sufficiently robust and quickly initiated, Fitch believes that Butler can achieve positive operating cash flow and covenant compliance in FY 2024,” the Fitch report reads.
According to Tom Chakurda, chief marketing and communications officer at Excela Health, “The analysis is straight forward and we decline to elaborate. We remain steadfastly focused on increasing revenue, efficiencies and effectiveness across our system.”
This story was updated at 1:25 p.m., June 28 to include a statement provided by Excela Health chief marketing and communications officer Tom Chakurda. A previous version of this story did not include this statement.
