UPMC hit with credit downgrade over coronavirus response costs

Fitch Ratings has downgraded Pittsburgh-based UPMC's credit rating to "A" from "A+." The rating outlook is stable.

The rating action, which occurred March 24, was primarily due to UPMC's plan to increase its long-term debt by $1.2 billion in addition to borrowing $1 billion in short-term capital this year.

"The interim financings will be fully drawn during 2020 and are intended to help address any additional working capital needs during the current coronavirus outbreak but will be paid back before the end of the audit year," Fitch said. 

The credit rating agency said it expected UPMC's margins to increase in fiscal year 2020 after the health system reached a new 10-year agreement with Pittsburgh-based Highmark in June. However, the COVID-19 pandemic will push that timeline back.

"The operating recovery will have to wait while UPMC, like many other providers, address the short-term disruptions from the coronavirus pandemic on both the clinical side as well as the possibility of increased insurance claims at its health plan," Fitch said. 

The credit rating agency said it expects UPMC's leverage metrics to remain weak for the foreseeable future due to the increased debt as well as the possible decrease in cash from operating constraints this year.

"While UPMC's financial performance through the most recently available data has not indicated any impairment, material changes in revenue and cost profiles will occur across the sector, and will likely worsen in the coming weeks and months as economic activity suffers and government restrictions remain in place or expand," Fitch said.

Fitch noted that UPMC's leading market share in western Pennsylvania continues to be its main credit strength. The health system has an estimated 59 percent share in Allegheny County, Pa., which is home to roughly 1.2 million people. Fitch also views UPMC's revenue diversification as a credit positive.

The rating action by Fitch came after S&P Global Ratings downgraded UPMC's credit rating to "A" from "A+" on March 19. 

"The downgrade reflects thin margins that have not met expectations for the past two years coupled with the unexpected additional debt issuance of $1 billion that strains the balance sheet and debt service coverage," S&P Global Ratings credit analyst Cynthia Keller said. "While UPMC's absolute amount of unrestricted reserves continues to increase, the growth has been tempered by high capital spending and has not kept pace with rising costs or debt. Because of these factors, we no longer view UPMC's financial profile as being in line with an 'A+' rating."

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