Swedish Covenant Health, IL Rating Outlook Revised To Negative On Weak Operating Performance; 'BBB' Rating Affirmed


CHICAGO (S&P Global Ratings) April 2, 2019--S&P Global Ratings revised its 
outlook to negative from stable and affirmed its 'BBB' long-term issuer credit 
rating (ICR) on the Illinois Finance Authority's series 2016A revenue bonds 
issued for Swedish Covenant Health (SCH). 

"The outlook revision to negative reflects SCH's unexpected operating margin 
loss in fiscal 2018, which fell short of management's budgeted operating 
margin and represented considerably weaker performance than in the year 
before," said S&P Global Ratings credit analyst Elizabeth Bachelder. 

Several factors contributed to the weaker operating performance, including 
340B reimbursement cuts, underbudget revenues from new physician recruits, and 
an increase in self-pay patients, as well as volume contraction due to the 
delayed completion of the emergency department (ED) renovation. In addition, 
management reports it was not able to meet its full-time equivalent 
right-sizing target in fiscal 2018 due to the staffing required to manage the 
fiscal 2017 electronic medical record implementation. Management is projecting 
operating performance improvement for fiscal 2019, supported by its commitment 
to expense base reduction, favorable changes to Illinois' Medicaid hospital 
reimbursement design, as well as some volume recovery from the completion of 
its ED renovation. However, the hospital is underperforming its operating 
budget through the first quarter of fiscal 2019, and given SCH's history of 
thin and uneven operating performance as well as its challenging payer mix and 
ongoing industry pressures, we think sustained improvement could be difficult 
for SCH to achieve. 

Sustaining the 'BBB' rating is SCH's largely stable business position in 
Chicago's competitive, fragmented north side market, as well as its strategic 
partnerships with larger service area providers. We also expect SCH to 
maintain a good balance sheet for the rating level as it weathers the 
financial pressures inherent in the business model of a "safety net" hospital 
and balances its approach of using cash on hand to deleverage against 
maintaining sufficient operating liquidity. 

The negative outlook reflects some uncertainty around whether SCH will meet 
its improved operating budget for fiscal 2019 and sustain improved operating 
performance and MADS coverage comfortably above 2x throughout the outlook 
period. In addition, although SCH's balance sheet is good for the rating 
level, it does not provide substantial cushion for continued operating 
challenges. 

We could lower the rating over the outlook period if SCH misses its operating 
budget in fiscal 2019, creating a trend of sustained operating losses, or if 
it is unable to maintain MADS coverage above 2x. We could also lower the 
rating if SCH's unrestricted reserves decline or fail to grow--whether due to 
deleveraging or any other reason--such that days' cash on hand is no longer in 
line with medians. A decline in SCH's market share or any other negative 
changes to its enterprise profile would also create rating pressure. 

If SCH can demonstrate improved operating performance and maintain its balance 
sheet strength throughout the two-year outlook period, we could revise the 
outlook to stable. While an upgrade is not likely in the near term, if SCH can 
generate consistent positive operating performance while maintaining its 
business position and incrementally improving its balance sheet, we could 
consider a higher rating.
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