Slowing revenue growth, loss of some doctors and "expense challenges" prompted a major bond rating service to downgrade its assessment of Erlanger Health System's fiscal health this week.
Moody's Investors Service issued a notice of the downgrade on fixed-rate revenue bonds from Baa2 to Baa3 on Monday, which affects approximately $150 million in rated debt. The move comes after Erlanger's latest financial report in January revealed the Chattanooga-based health system ended the second quarter of fiscal year 2020 with a $5.4 million loss from operations and a total net loss of $6.9 million compared to budgeted loss of $2.9 million.
"The downgrade to Baa3 reflects Erlanger's wide and unexpected variance to budget after recent years of significant enterprise growth, expansion of complex services and various strategies to increase market capture. Recent moderation in revenue growth, following the departure of key physicians, and expense challenges will create greater hurdles to reaching fiscal 2020 targets, " the Moody's report said.
Jim Coleman, chairman of the hospital's board of trustees' budget and finance committee, called the downgrade "disappointing news."
"This adds urgency for management to execute on the current plans to end the fiscal year 2020 with strong financial performance that can continue into the next fiscal year," Coleman said in an emailed statement. "As chairman of the Budget and Finance Committee, we will be working to monitor the performance of the improvement efforts that management is undertaking to produce concrete results."
Although the lower rating still represents a "stable" financial outlook, it means the Chattanooga-based health system will pay more interest when borrowing money for future capital projects.
Moody's said improved financial performance and Erlanger's maintenance of leading market share position could prompt an upgrade. However, continued budget variance driven by declining volumes or inability to lower expenses could lead to another downgrade.
Erlanger failed to meet its budget goal and ended fiscal year 2019 with a $4.4 million loss. Year to date, Erlanger has lost $8.6 million from operations and sits $11.4 million in the hole once accounting for interest and other non-operating expenses. Erlanger officials had budgeted for a $5.3 million net loss at this point, which is halfway through the hospital's fiscal year that began July 1 and ends June 30.
Moody's said Erlanger management is focused on turnaround strategies, and the hospital's current challenges are "partially offset" by a relatively low debt burden, recent completion of several large capital projects and market leadership in a growing economy.
Britt Tabor, Erlanger's chief financial officer, said in an emailed statement that the new rating reflects the hospital's current strengths and weaknesses.
"Moody's recognized the recent challenges Erlanger has encountered and acknowledged 'management's keen articulation of a multi-faceted plan that will enable the system to report better financial performance during fiscal 2020 and into 2021,'" he said.
Tabor noted that another major bond rating service — Fitch Ratings — also recently conducted a review of Erlanger with no action. Fitch's current rating of the Erlanger is BBB with stable outlook.