Proposed merger doesn't save Fairview Health from rating drop

Moody's Investors Service downgraded the revenue bond ratings of Minneapolis-based Fairview Health from "A3" to "Baa1." 

The downgrade reflects Moody's  projection that weak operating performance will be challenging to overcome due to increased labor costs and lower inpatient volume. Inflation and annual transfers to the University of Minnesota in Minneapolis will also hamper margins.

The outlook is negative for Fairview — which has about $1.6 billion in outstanding debt — reflecting protracted pre-pandemic operating challenges that are exacerbated by higher than expected labor costs, according to Moody's. This will likely lead to poor operating cash flow margins in the near term.

"If Fairview is not able to maintain forecasted cash metrics, albeit at lower levels, or if operating performance does not exceed forecasts, the rating could be downgraded further," Moody's said in a Jan. 18 news release. "This would raise the risk of breaching rating triggers in bank agreements."

The rating does not consider Fairview's proposed merger with Sioux Falls, S.D.-based Sanford Health or the university's interest in re-purchasing the East Bank campus that it sold to Fairview in 1997, as well as buying facilities on the West Bank that the university never owned.

"One or both of these transactions, if finalized, would result in meaningful changes to Fairview's overall profile," Moody's said.

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