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Tower Health’s financial condition called ‘precarious’ in credit downgrade to ‘junk’ status

The credit downgrades followed huge operating losses and balance sheet deterioration at the nonprofit based in West Reading.

Reading Hospital in West Reading is the anchor facility for Tower Health, which on Oct. 30 received sharp credit downgrades from Fitch and Standard  & Poor's.
Reading Hospital in West Reading is the anchor facility for Tower Health, which on Oct. 30 received sharp credit downgrades from Fitch and Standard & Poor's.Read moreTower Health

Two major credit-ratings agencies slammed Tower Health with downgrades to “junk” bond status Friday, declaring that the nonprofit owner of seven Philadelphia-area hospitals is in “precarious financial position” and “faces a difficult path to recovery.”

The downgrades by Standard & Poor’s and Fitch Ratings came after more than $550 million in operating losses during the two years that ended June 30 and a rapid deterioration of Tower’s finances. Unrestricted financial reserves are down by $240 million, or 25%, over the last two years. Losses are expected again in the fiscal year ending next June.

“While we understand that management has initiatives underway to improve operations, we believe the magnitude of the losses creates a difficult path to recovery, particularly given that volumes are not yet at pre-pandemic levels,” S&P said in its report, which gave Tower a “BB+” rating, down three notches. BB+ is the highest speculative rating, also called junk bonds.

Tower made a risky expansion — the debt-fueled acquisition three years ago of five community hospitals in Southeastern Pennsylvania — and that was compounded when the coronavirus pandemic hammered health systems' finances.

Businesses often recover, but it can take years, even without the continuing uncertainty of COVID-19, which has pushed out elective surgeries and is now surging.

Fitch downgraded Tower by two notches, also to “BB+” but offered an optimistic “opinion that Tower Health’s board will ultimately find secure financial footing.”

Besides acquiring five community hospitals in Chester, Montgomery, and Philadelphia Counties from Community Health Systems Inc. for $417 million, Tower, in a joint venture with Drexel University, bought St. Christopher’s Hospital for Children in North Philadelphia out of bankruptcy for $50 million, not including the real estate. The joint venture pays to rent the St. Christopher’s property, which was sold separately for $65 million to a real estate firm.

“These investments have failed to show meaningful financial progress and continue to be a drain on overall system performance,” according to S&P, which suggested that Tower management will “evaluate the strategic fit” of the hospitals in Chestnut Hill, Phoenixville, Pottstown, Coatesville, and West Grove. That means it might try to sell the properties.

The only profitable part of Tower is its legacy Reading Hospital in West Reading.

In a statement, Tower called the reports “sobering.”

Because its operations failed to generate enough cash to meet loan requirements, Tower must hire a restructuring consultant to help it regain its financial footing.