Bonds

Tennessee’s Erlanger Health upgraded by Moody’s and Fitch

Erlanger Health of Chattanooga, Tennessee, was upgraded by Moody’s Ratings to Baa1 from Baa2 and by Fitch Ratings to A-minus from BBB-plus.

Both ratings agencies have positive outlooks on their rating.

The Chattanooga Health, Educational and Housing Facility Board will issue $322 million of bonds on behalf of Erlanger, in a negotiated deal the week of Aug. 5, with Morgan Stanley as lead underwriter and JPMorgan as co-manager.

Moody’s Ratings and Fitch Ratings note Erlanger Health has improved its liquidity in recent years.

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“The recent upgrades from Moody’s and Fitch are a testament to Erlanger’s unwavering commitment to financial health and exceptional patient care,” said Erlanger president and CEO Jim Coleman, Jr. “By executing a robust performance improvement plan and growing our breadth of services, we have positioned ourselves strongly for the future. Erlanger remains dedicated to prioritizing exceptional patient care while maintaining a strong financial foundation to support our mission.”

Fitch upgraded Erlanger’s issuer default rating Thursday, citing consistent financial performance since fiscal 2020, which has led to improved liquidity, “which Fitch believes will continue with sustained sound cash flow.” The planned bond, which will carry the IDR rating, will allow for additional balance sheet growth, according to the rating agency.

Management has been committed to improving margins, resulting in operating earnings before interest, taxes, depreciation, and amortization margins averaging 7.7% over the last four fiscal years, Fitch said.

The upgrade also stems from Erlanger’s leading market share, which is twice its nearest competitor, Fitch said.

Erlanger’s cash and unrestricted investments position improved to $480 million at the end of fiscal 2024 from $445 million at the end of fiscal 2023, Fitch said. Its end of fiscal 2024 liquidity position is shown in a ratio of 115% of cash to pro forma debt and 140 days cash on hand.

Revenue increased from $1.27 billion in fiscal 2023 to $1.36 billion in fiscal 2024, Fitch said.

For its part, Moody’s cited similar factors to explain its upgrade.

“Challenges include modest liquidity relative to expected rise of capital spend, a competitive market, with the presence of two other systems, and continued reliance on supplemental funding as a safety net provider,” Moody’s said.

Moody’s said its positive outlook “reflects solid operating results that support 7% operating cash flow margins and continuous build of balance sheet measures. If the state’s proposed directed payment program receives approval from [United States Centers for Medicare and Medicaid Services] it could result in accelerated cash flow strengthening and liquidity growth, a clear credit positive for the system.”

When including the upcoming bond, Erlanger will have $407 million in long-term debt, $56 million in pension liabilities below 80% funding level, and $14 million in lease liabilities and short-term debt, according to Fitch. Excluding the coming bond, Erlanger has $207 million in debt, according to Moody’s.

Erlanger Health is a 930-bed system with six facilities. It also operates Erlanger Medical Group, a multi-specialty practice with over 500 providers. In July 2023 it transitioned from being a public authority to being a private not-for-profit entity.

The Hamilton County Commissioners approved the new bond earlier this month.

The upgrades take place as analysts predict a financially difficult year for the healthcare industry.

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