Credit rating agencies ding Rex, UNC Hospitals

UNC Health Care System’s first financial loss in years got a thumbs-down Thursday from a Wall Street rating firm for the system’s two largest hospitals: Rex Healthcare in Raleigh and UNC Hospitals in Chapel Hill.

Standard & Poor’s Rating Services revised its outlook on the two hospitals’ bonds to negative from stable on account of parent UNC Health Care’s $31.2 million loss in 2014.

UNC’s loss, on the heels of operating income of $94.2 million in 2013, was caused by significant outlays for electronic medical records, recent acquisitions and investments in affiliates.

Even though UNC officials expect the system to return to normal financial levels this year, S&P noted: “We are uncertain of that outcome.”

To deal with the financial pressures, UNC Health Care has launched Carolina Value, a comprehensive system-wide review to improve financial performance. Guided by an outside consulting firm, Carolina Value is expected to result in “extensive cost cutting and revenue enhancement measures” at Rex, S&P said.

As part of that strategy, in February the Rex board froze employee pensions effective March 31.

Rex, which employs more than 5,600 people, has never had a layoff and is not expecting to trim staff, said spokesman Alan Wolf. The credit firm opinions were expected, he said, as Rex is about to issue $150 million in bonds on March 26 to finance the construction of its N.C. Heart & Vascular hospital.

“No one was surprised about the downgrade and negative revisions,” Wolf said. “But the leaders at UNC Health Care are confident that these long-term investments will pay off.”

Earlier this month Fitch Ratings revised its outlook on Rex’s bonds to negative, based on the Raleigh system’s “large debt issuance combined with historical cash transfers to [UNC] Health System.”

Moody’s, also this month, maintained Rex’s bond outlook at stable, but downgraded the hospital’s existing debt. Moody’s cited cash transfers to UNC as well as “a more than doubling of debt” by Rex.

S&P’s report on Rex describes the system’s aggressive expansions and investments in the competitive Triangle health care market. S&P, for example, cited the region’s growing demographics and healthy market in favor of Rex’s strong financial profile.

“Rex and UNC Health Care expect it will serve as a premier destination for comprehensive cardiac services,” the S&P report said.

The year the cardiac facility opens, S&P said, Rex will begin construction of a new 50-bed Holly Springs hospital. Approved by state health authorities last year, the Holly Springs facility will cost about $70 million and will open in 2019.

On a stand-alone basis, Rex had an operating income of $2.8 million in 2014, the year UNC Health System posted its loss and was off by $125 million from 2013. Rex was also off course in fiscal 2014, down from an operating profit of $40 million in 2013.

Rex appears to have returned to past performance levels; in the first half of the current fiscal year, Rex reported operating income of $18.2 million.

S&P said Rex’s weak spots are not only the doubling of its debt but also heavy subsidization of UNC Health Care System, including the money-losing UNC Physician Network.

S&P said that Rex paid $45.1 million in subsidies to parent UNC in 2014 and is expected to pay $40 million in 2015. In subsequent years the annual subsidies from Rex drop to between $14 million and $23 million.

The payments support capital expenses and investments in new affiliates, such as Caldwell Memorial Hospital in Lenoir and High Point Regional Health System, as well as the UNC Health Care enterprise fund for clinical, research and academic missions of the UNC School of Medicine.

This story was originally published March 12, 2015 at 6:27 PM with the headline "Credit rating agencies ding Rex, UNC Hospitals."