Standard & Poor's Ratings Services has downgraded the credit rating of Los Altos Hills, Calif.-based Daughters of Charity Health System six pegs, from "BBB-" to "B-", as the Catholic-based network continues to struggle mightily with its finances.
The sweeping move now puts DCHS below investment-grade. S&P analysts said many factors led to the downgrade. In the first half of its 2014 fiscal year, ended Dec. 31, 2013, DCHS recorded an operating loss of $92.8 million, which equated to a -14.9 percent operating margin. This comes as DCHS posted an operating loss of $107.4 million in FY 2013, as utilization was and continues to be down across the board. DCHS also only had 36 days of cash on hand as of Dec. 31.
This past January, DCHS executives said they were actively shopping the system. The six-hospital system, which has facilities in many poor and economically strained neighborhoods throughout California, has solicited proposals from all types of organizations, including Catholic, public, nonprofit and for-profit.
DCHS had been set to merge with St. Louis-based Ascension Health two years ago, but Ascension ultimately backed out of the deal, which S&P said was another contributing factor to the system's large credit downgrade. DCHS faces numerous other challenges, including a high reliance on California's provider fee program, and it's unlikely to see a quick turnaround soon, the report said.
"The negative outlook reflects our opinion that DCHS' rating could be lowered further within the one-year outlook period if DCHS' plans to sell its hospitals does not materialize or are delayed," S&P analysts wrote. "We believe this could occur because we expect that the system's operations will continue to be pressured, and we believe that DCHS' balance sheet offers very limited cushion for further prolonged losses."
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