The nation’s largest children’s hospital has hit a rough financial patch, leading to two bond rating downgrades and plans to cut nearly 1,000 jobs, while it eyes a return to the municipal bond market.
Ratings for Houston-based Texas Children’s Hospital were cut one notch to AA-minus by Fitch Ratings in July and Aug. 19 by S&P Global Ratings, which said fiscal 2024 is on track to be the health system’s worst performing year on record.
The actions come as the non-profit health care sector continues a slow recovery from the COVID-19 pandemic as hospitals battle elevated operating expenses amid high inflation and the need to attract and retain staff.
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S&P, which in July 2023 placed a negative outlook on Texas Children’s AA rating, said the downgrade “reflects the system’s substantial operating losses in fiscal 2024 driven by underperformance across all major business units including startup losses at its new Austin hospital, pressured legacy Houston operations, and a large reversal of Texas Children’s Health Plan (TCHP) profitability.”
S&P changed its outlook to stable after the downgrade.
“Though we expected financial profile weakening at last review, operating performance and unrestricted reserves through June 30, 2024, are below expectations and we believe recovery to historical levels may take some time,” S&P analyst Patrick Zagar said in a statement.
Similar factors were cited by Fitch, which said they “contributed to the operating income loss of approximately $198.1 million (negative 6.4% operating margin and negative 3.1% operating EBITDA margin) through six months of (fiscal year 2024).
“Fitch does not expect Texas Children’s to meet its obligated group debt service coverage covenant at (the end of fiscal) 24,” the rating agency reported. “Despite the missed debt service coverage covenant, the potential of triggering an event of default is very remote as it would only occur if coverage is below 1x for two consecutive years and both the days cash on hand (less than 150 days) and debt to capitalization (over 66 2/3%) covenants were missed in the second year.”
Fitch maintained its stable outlook after the downgrade.
Moody’s Ratings affirmed its Aa2 rating and stable outlook in July, citing “decisive initiatives to drive a strong and swift recovery in fiscal 2025 following unexpected cash flow losses in 2024 due to the confluence of material and largely temporary operating challenges.”
Texas Children’s expressed disappointment with the downgrades as well as confidence in a “quick turnaround for 2025.”
“A change in rating is not permanent and certainly does not reflect the quality of care we provide to our patients or the dedication and hard work of our faculty and staff. It comes with the territory of building for our future,” a statement from the system said. “We’re embracing a season of navigating some financial headwinds and pivoting our approach to make sure we do what fits Texas Children’s and best serves our patients and families.”
In an Aug. 6 Federal Worker Adjustment and Retraining Notification Act notice to the Texas Workforce Commission, the hospital said “changing business needs” will lead to the permanent layoff of 997 workers at its Houston location in October, November, and June.
The rating downgrades came ahead of an approximately $250 million revenue bond issue Texas Children’s would sell through the Harris County Cultural Education Facilities Finance Corp., the conduit through which it has previously issued tax-exempt debt.
The RBC Capital Markets-led deal, which could include a refinancing of some outstanding debt, could be priced in August or September, according
The hospital did not provide an update on the sale’s timing. It had $1.3 billion of outstanding debt when fiscal 2023 ended Sept. 30, according to Moody’s.
The hospital, the nation’s largest pediatric facility, is on the Texas Medical Center campus in Houston and serves as a primary teaching site for Baylor College of Medicine’s pediatric and obstetrics and gynecology departments. The system, which launched its first hospital in 1954, expanded outside of the Houston area with a 52-bed hospital in Austin that opened in February.
Its health plan incurred an enrollment decline after Medicaid eligibility was pared down from pandemic levels. The plan posted a $200 million operating loss through the first nine months of fiscal 2024, according to S&P.
Texas Children’s “high reliance on sometimes unpredictable Medicaid funding for both the hospital and health plan will continue to be a fundamental challenge. Moody’s said.
“Large and infrequent Medicaid fees and receipts, combined with comparatively low monthly liquidity, will require (Texas Children’s Hospital) to draw on bank lines to manage cash flow variability for the hospital,” it added.
For the overall nonprofit hospital sector, operations have stabilized with the gap between revenue growth and expense growth shrinking, according to Fitch, which gave the sector a deteriorating outlook for 2024.
“Fitch’s 2023 statistics reveal 7.6% expense growth for hospitals versus 7% revenue growth, a more favorable comparison following the 9.5% expense growth against 5.8% revenue growth of 2022,” the rating agency said this month.
Still, there is a continued decline in median days cash on hand, which fell to 211.3 days in 2023 from 216.2 in 2022, which in turn was down from a high of 260.3 in 2021.
Moody’s, which
“Liquidity continued to decline in all regions, but the Midwest remained strongest,” Moody’s said in an Aug. 6 report. “Days cash on hand in the Midwest fell to 212 days, but remained above all other regions and the national median of 189 days.”
Kaufman Hall’s latest
“There is a growing divide between higher and lower performing hospitals, even as overall market conditions continue to stabilize,” Erik Swanson, Kaufman Hall’s senior vice president and data and analytics group leader, said in a statement. “Smaller hospitals continue to face challenges related to size and access to capital.”