Moody’s downgrades Butler Hospital bond rating again
More discouraging financial news arrived for the Butler Health System on Monday, April 1, as credit rating agency Moody’s downgraded the hospital system’s credit rating from Baa3 to Ba1, citing “ongoing financial stress and operating cash flow losses.”
This marks the second time in less than a year that Moody’s has downgraded Butler Health’s credit rating, as it dropped the system from Baa2 to Baa3, which Moody’s ranks as medium-grade investments, in May 2023.
Butler Health System, which merged with Excela Health to form Independence Health System at the start of 2023, keeps separate financial records from Independence.
The downgrade to Ba1, which Moody describes as having speculative elements, comes in spite of signs of a possible financial turnaround. Butler Health’s most recent quarterly results, which were posted in late February, indicate the health system sustained a loss of just over $5 million for the quarter ending Dec. 31, 2023.
While this is still a loss, this is a vast improvement over the loss of just under $13 million suffered in the previous quarter, which ended Sept. 30, 2023. It also marked an improvement over the results for the same quarter a year earlier, where Butler Health lost more than $21 million for the quarter ending Dec. 31, 2022.
Butler Health System’s financial reports include numbers for both the “obligated group” and the “consolidated group,” which comprise slightly different sets of assets and liabilities. The above numbers are for Butler Health System’s “obligated group,” which comprises the Butler Memorial Hospital, Clarion Hospital, BHS FasterCare Laboratory Services, Butler Medical Providers and the realty subsidiary Nixsar Health.
Clarion Hospital was acquired by Independence in February 2023.
Despite the uptick on the bottom line, Moody’s went through with the downgrade due to Butler Health’s continued inability to meet its obligations. According to the report, Butler Health has $120 million of outstanding debt, and breached rolling 12-month debt-service coverage tests in September and December 2023.
“There is a possibility that BHS will breach its (Master Trust Indenture) debt service coverage covenant for the second year in a row,” reads the Moody’s report. “Butler has also continued to breach its quarterly debt service coverage test for its bank debt.”
The report from Moody’s did mention some redeeming characteristics, such as improving patient volumes and its increased market share in the region as a result of its merger with Excela Health.
Moody’s also mentioned the possibility that Butler Health could turn its rating around for the better if it achieves a sustained improvement in operating performance and improved cash flow.
However, the rating could drop yet again if cash flow does not turn positive by 2025, or if cash reserves decrease below 90 days’ worth, according to the report.
The other half of the Independence Health merger, Excela Health, also received a rating downgrade from Moody’s on Monday, from Baa2 to Baa3. Unlike Butler Health, however, the outlook for Excela Health remains “stable.”
“Moody’s latest ratings of both the Excela and Butler divisions of Independence Health System reflect the financial challenges and issues facing all hospitals in our region,” said Tom Albanesi, CFO of the Independence Health System. “We are confident our improvement plan will continue to establish and secure the necessary financial foundation for the success of IHS.”
This story was updated at 12:47 p.m. April 3 to clarify that the downgrade was due to Butler Health System’s continued inability to meet its obligations. A previous version said the downgrade was due to the system’s “continued inability to meet its debt obligations.” Investopedia defines debt obligations as a complex structured finance products that are backed by a pool of loans and other assets. “We have met all principal and interest payments on all debt obligations in full and on time,” said chief marketing officer Tom Chakurda.
