Medford, Oregon-based hospital nonprofit Asante Health had its A-plus rating, with negative outlook, affirmed by Fitch Rankings at year-end as it really works toward completion of a latest constructing at its flagship hospital.
Fitch said in a report Tuesday that it maintained the negative outlook, first assigned in January, because “Asante continues to record weakened operational performance that is expected to proceed through fiscal 2024.”
The system had $545.6 million in long-term debt, comprised mainly of the series 2020A and 2020B revenue bonds of $534.5 million, most taken on for expansion projects, as of the top of fiscal 12 months 2022, in accordance with its audited financial plan for year-end 2021 and 2022.
A rendering of the $455 million pavilion on the Asante Rogue Regional Medical Center campus in Medford, Oregon, expected to be accomplished in February.
Asante Health
Though Asante’s debt is to pay for expansion projects nearing completion, much of the system’s headwinds are much like that faced by the remainder of the sector.
Despite a modest positive turning point in 2023 for some U.S. not-for-profit hospitals, 2024 will again be categorized as one other ‘make or break’ 12 months for a sizeable portion of the sector, Fitch Rankings said in its annual outlook report published Dec. 5.
Not-for-profit hospitals are mired in an ongoing “labor-demic” with significant staff shortages, intense wage pressure and heightened inflation, in accordance with Fitch. Out of those ongoing struggles has emerged a ‘trifurcation’ of credit quality that can only develop into more outstanding in 2024, in accordance with the rating agency.
“Much of a hospital’s ability to achieve success will rely on their ability to recruit and retain staff within the currently hyper-competitive landscape for personnel,” said Fitch Senior Director and sector head Kevin Holloran.
Bond covenant breaches can be one other area of concern heading into 2024.
“Second 12 months violations, which might occur in calendar 2024 as fiscal 2023 audits are finalized, may intensify the potential for bondholders to declare an event of default and speed up payment of bonds,” Holloran said.
Asante has three hospitals — Asante Rogue Regional Medical Center, Asante Ashland Community Hospital, and Asante Three Rivers Medical Center — and 36 community-based clinics. It operates in a nine-county region in southern Oregon and northern California.
It expects to finish in early 2024 a 323,595-square foot Pavilion constructing for expanded inpatient, outpatient and demanding care services on the north side of its flagship Asante Rogue Regional Medical Center campus in Medford.
The brand new constructing would connect with an existing six-floor patient tower. The bonds also funded an expansion of the emergency department at Asante Three Rivers Medical Center and two regional cancer centers in Medford and Grants Pass, Oregon.
Each Fitch and S&P Global Rankings assigned negative outlooks to the healthcare system, initially in January for Fitch, and in August for S&P, citing weakened operations and balance sheet constraints.
Asante recorded a $33 million loss from operations for fiscal 12 months 2023 ended Sept. 20 that equated to a 1.4% operating margin, based on EBITDA, earnings before interest, taxes, depreciation, and amortization, Fitch said. While Fitch noted that may be a significant improvement from fiscal 2022’s $61 million loss from operations, analysts said Asante has limited financial flexibility at the present rating level.
“Operations are still challenged as management continues to implement its financial recovery plan,” Fitch analysts said. “Once completion risk for the sizable Pavilion project has been eliminated, and the system is capable of display more successful implementation of its performance improvement goals, then a return to a stable outlook could be possible.”
Chief Executive Officer Tom Gessel and other Asante executives are “out of the office as a consequence of the vacations, and subsequently unavailable to comment,” in accordance with a spokeswoman.
Gessel was named CEO in June, and began as CEO Sept. 18, replacing Scott Kelly, who had retired in February. Moreover, long-time Chief Financial Officer Greg Wojtal retired in June 2022, and the prior vp of finance assumed the position in November 2022, in accordance with S&P’s August report.
On its affirmation of the A-plus rating, Fitch said it “believes the system will proceed to generate sufficient operational money flow to make its debt payments, fund routine capital investments, and generate moderate liquidity growth over the medium term.”
In fiscal 2023, Fitch said, Asante generated total operating revenues of roughly $1.2 billion, and it has a robust market share position of 78% in its primary service area.
A map of the Asante Rogue Regional Medical Center depicts where the brand new pavilion is situated.
Asante Health
Fitch qualified the balance sheet constraints as moderate saying the constraints are consistent with inflationary pressures on labor and supplies, recent market volatility and post-pandemic operating challenges related to capability, throughput and average length of stay.
Asante also has no plans to issue debt during S&P’s two 12 months rankings outlook period, analysts said after they assigned the negative outlook and affirmed an A-plus rating. The investment grade rating of A-plus is reflective of Asante’s “weaker operations coupled with a notable decline in unrestricted reserves and subsequently a more constrained balance sheet for the present rating,” S&P said.
“While operating margins have improved through the primary eight months of fiscal 2023, ended May 31, we imagine Asante has limited flexibility at the present rating level to administer further volatility in operations,” S&P said.
S&P also cited Asante’s enterprise strengths, including its dominant and essential position within the southern Oregon market, expanding outpatient presence, and a growing health network.