Fitch lowers debt rating on Summa, citing debt, operations

Fitch Ratings has lowered its long-term view on the debt of Summa Health System because of its “increasing debt burden coupled with a slower-than-anticipated improvement in operating performance and liquidity position.”

Fitch assigned its BBB+ rating to $175 million of fixed-rate hospital facilities revenue bonds to be issued on behalf of the Akron, Ohio-based system during the week of April 26. The BBB rating means “expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.”

Proceeds from the bond sale will be used to pay for capital projects, as well as to reimburse Summa for past capital expenditures, repay short-term bank notes and fund a debt-service reserve account, Fitch said in a written statement. Summa may issue up to $24 million more in bonds to refund outstanding debt, Fitch said.

At the same time, Fitch lowered its A- rating on $39.2 million in bonds issued in 1998 and $46.9 million in bonds issued in 2004 to BBB+. The rating firm changed its outlook on Summa to “stable” from “negative” with the rating downgrade.

“Although Summa’s growth strategy is expected to generate increased volumes and improved profitability over the long-term, Summa’s current profile no longer reflects appropriate levels expected of ‘A-’ rated entities,” Fitch said in its statement. Fitch also said Summa’s “ambitious capital plans” are likely to limit liquidity and add to debt in the near term.

“Given the fact that Summa Health System is currently experiencing a lot of growth, we were not surprised that our Fitch rating was affected,” the system said in a written statement. “As we continue to implement our strategic plan, we fully expect our rating to be upgraded.”

On the positive side, the system anchored by Summa Akron City Hospital and Summa St. Thomas Hospital has historically had adequate or more than adequate debt coverage. That’s important as the system grows.

Already, Summa has become the market leader with 58 percent of primary service patients through hospital acquisitions and doctor alignments, Fitch said. Summa’s revenue was $1.31 billion last year, excluding revenue from two joint ventures, the rating firm said.

Summa also has “a robust integrated delivery platform through its physician alignment strategy and health plan,” which lends additional strength. This platform also “demands management rigor and discipline to ensure the benefits are fully realized, which Fitch believes is achievable,” the firm said.

As for its operating performance, Summa’s growth, its health plan–SummaCare–and the lingering effects of the economic recession “have combined to blunt Summa’s operating performance over the last few years,” Fitch said. Summa’s operating margins were 0.6 percent in 2009, -1 percent in 2008 and 3.7 percent in 2007. That compared to other Fitch A-rated hospitals that had a median operating margin of 2.7 percent over those three years, the rating agency said.

Moving forward, Fitch will look for improved operating performance and a rebuilt balance sheet before it upgrades Summa debt, the firm said.