All three major credit-rating agencies are keeping a wary eye on Novant Health these days after the Winston-Salem-based hospital system’s recent expansion in the Palmetto State.
Moody’s Investors Service announced on Feb. 6 that Novant’s Aa3 long-term credit rating is now “under review for downgrade,” after the institution bought a trio of hospitals in South Carolina for about $2.4 billion. Aa3 is a strong investment-grade rating by Moody’s.
As Novant “financed the acquisition with a bridge loan, roughly doubling its debt load,” raters now need to look at whether it can “improve operating cash flow at its legacy sites” and “rebuild its balance sheet over time as it has in the past,” Moody’s said.
The move by Moody’s followed announcements by Fitch Ratings in December and S&P Global in November that they had placed Novant on their downside watch lists. Like Moody’s, they singled out Novant’s purchase of Hilton Head Hospital on Hilton Head Island, East Cooper Medical Center in Mount Pleasant, and Coastal Carolina Hospital near Hardeeville in the southernmost corner of South Carolina.
“Relative to the system’s total debt of just under $2.7 billion as of June 30, 2023, we believe Novant Health’s debt metrics would be inconsistent with the current [AA-] rating should the acquisition consummate as expected,” S&P analyst Patrick Zagar said in November.
Novant, a not-for-profit authority, bought the South Carolina hospitals and their affiliated physician practices from Dallas-based Tenet Healthcare, a publicly traded company. Tenet said the hospitals in the deal had booked earned before taxes, depreciation and amortization of about $150 million in fiscal 2022-23.
Asked about the agencies’ comments, Novant issued a statement: “For a transaction of this magnitude, we expect thorough discussions with rating agencies and other stakeholders about the organization’s financial strength. These conversations will unfold in the coming months. Our acquisition aligns with our vision to extend our reach into South Carolina, benefiting additional communities.”
The authority also said the acquisition ” will generate significant long-term value. We are not surprised by Moody’s review of our long-term credit rating in response to our efforts to fully capitalize on the transformative potential of this acquisition.”
Winston-Salem-based Novant’s most recent annual report said it had $2.6 billion in long-term debt as of the end of 2022. It recorded a $222.8 million deficit for the year after a $251.1 million investment loss outweighed $68.2 million in operating income. Most investment portfolios rebounded in 2023 with stronger market performance, but Novant hasn’t disclosed its most recent annual results.
Novant owns Winston-Salem’s Forsyth Medical Center, Charlotte’s Presbyterian Medical Center and the New Hanover Regional Medical Center in Wilmington.
Based in Texas, Tenet in 2023 reported a net profit of $611 million. It went into the Novant deal with 61 hospitals, with the largest groups located in California and Texas. The three South Carolina hospitals sold to Novant had a total of 277 beds. Tenet retains two South Carolina hospitals, in Rock Hill and Fort Mill, that have a combined 394 beds.
