Thomas Jefferson University this week outlined some big construction plans in South Jersey and hinted that it might build a large ambulatory care center in Center City, but also got a negative review from a credit rating agency.
Standard & Poor’s downgraded Jefferson’s credit rating by one notch to A from A-plus. Moody’s kept its rating at A2, its level that corresponds to the lowered S&P rating, and maintained its negative outlook, citing “sustained high financial leverage during a highly transactional period.”
At the same time, Jefferson said it plans to borrow more than $400 million in the municipal bond market for projects such as the construction of a 90-bed patient pavilion, an 822-car parking garage, and a helipad at Jefferson Washington Township Hospital.
The new borrowings are also slated to pay for the removal and replacement of Woodland Garage at Abington Hospital, plus smaller projects, including electronic medical records upgrades, throughout the 14-hospital system.
Jefferson’s preliminary bond offering statement, issued Tuesday, does not break out the cost of the individual projects. The plan also calls for $50 million of the proceeds to be used to repay older bonds.
In all, over the next five years, Jefferson has “identified and prioritized” more than $2 billion in capital expenditures, including the projects to be paid for with the new debt. That figure will be higher if Jefferson completes the pending acquisition of Einstein Healthcare Network.
However, the $2 billion plan does not include the construction of a “flagship ambulatory building” under consideration for Center City, or the cost of potentially buying Fox Chase Cancer Center and the insurer Health Partners Plans.
Jefferson said the price for Fox Chase, Health Partners, and other Temple University Health System operations could be “significant” and would likely require it to take on more debt. Moody’s said the Temple acquisitions, if completed, “could be transformative to the enterprise because of the scale and the potential cost.”
S&P global ratings analyst Cynthia Keller said her downgrade “reflects challenges associated with rapid system growth since 2014 that have suppressed operating margins and resulted in debt service coverage metrics that are below median levels, particularly when considering this additional debt issuance which was not contemplated at the last review.”
Jefferson’s ratio of total debt to cash flow reached 4.9 in the nine months ended March 31, including the new bonds, up from around 3 in 2015 and 2016, according to Moody’s. A higher ratio means the system has less financial flexibility. The system’s debt totaled $1.7 billion on March 31.
Jefferson spokesperson John Brand said the downgrade was expected “as Jefferson has expanded in size and scope through a series of mergers and acquisitions since 2014.” He noted that S&P affirmed Jefferson’s “financial stability and long-term outlook.”
Moody’s praised Jefferson’s integration of the five organizations it has acquired since 2015.
“Management’s significant progress on centralizing and consolidating corporate services and implementing an enterprise-wide financial and capital planning model will provide a strong platform for further integration and growth,” analysts Lisa Martin and Beth I. Wexler wrote in their credit opinion.
The analysts said Jefferson cut $135 million in costs in the year ended June 30, 2018, and is expected to achieve nearly $100 million in savings in the year ending June 30, less than management’s goal but still material.