Wall Street analysts remain bullish on WellStar despite possible regulatory reform

By David Pendered

Wall Street credit analysts gave little heed to potential changes in state regulations of Georgia’s hospital industry when they issued last week a stable rating to WellStar Health System.

A proposal to change the regulations that oversee hospital expansion was rejected by Atlanta’s House delegation, which represents Grady Memorial Hospital. Credit: Kelly Jordan

Moody’s Investor Service on March 5 issued a credit rating on WellStar that affirmed without change WellStar’s investment-grade credit rating and the outlook on WellStar’s ability to repay about $872 million of rated debt.

Analysts predict WellStar will record operating cash flow margins of 10 percent to 11 percent for at least two years, according to the rating action.

Given this rosy outlook, analysts saw no need to warn investors that WellStar may struggle to pay its debts. This represents an improvement from a rating action issued in 2016, when Moody’s downgraded WellStar’s rating as the company took on debt to buy five hospitals and merge with one non-profit hospital.

Moody’s released the latest rating action March 5, two days before the anticipated vote in the state House for a proposal to overhaul the state’s Certificate of Need law. The vote had been considered too close to call, though the House ultimately voted March 7 to reject the proposal.

Against this political backdrop, Moody’s analysts saw strong reasons to continue the existing rating on WellStar bonds of A2, which is an upper medium investment grade rating. According to the report:

  • “The A2 rating reflects Moody’s view that WellStar Health System (WellStar) will continue to benefit from its position as a large regional system in the greater Atlanta area, which enjoys favorable demographics including high growth and a diversified economic base.
  • “WellStar’s ability to pull disparate systems and entities into one unified enterprise will continue to be a core competency, as highlighted by its successful and ongoing integration of five newly acquired and one newly merged hospital in early 2016. We anticipate that WellStar will sustain very good margins, as evidenced by fiscal 2018 performance, which exceeded budget expectations, due largely to the success of its integration initiatives.”

Moody’s analysts also issued an outlook of stable to WellStar’s rating, saying:

  • “The stable outlook reflects Moody’s expectation that good financial performance will continue to result in operating cash flow margins in the 10%-11% range. This would help support increased capital spending over the next two years. Moody’s also expects that balance sheet metrics will continue to improve to levels more in line with pre-2016 levels.”
HB 198, voting

The preponderance of red ‘N’s resulted in the House rejection of House Bill 198. Credit: Georgia General Assembly

The pre-2016 levels referenced evidently refer to an opinion among Moody’s analysts that WellStar’s financial fundamentals were strong. It was the debt associated with expansion into a territory beyond WellStar’s historic area that caused concern. Analysts downgraded WellStar’s rating from a top-tier investment grade rating of Aa3 to the current medium-grade investment grade rating of A2 with this observation:

  • “The downgrade to A2 is due to WellStar’s expected debt-financed acquisition … which materially increases the system’s debt load and materially weakens balance sheet metrics to a level that restrains the rating at this time.
  • “The A2 rating acknowledges WellStar’s strong position as a large integrated healthcare delivery system with leading and growing market share in northwest metro Atlanta, a track record of strong operating performance providing ample historical debt service coverage and the expectation of a smooth transition for the new facilities given the extensive planning and management’s demonstrated success with past mergers and acquisitions.”

The Georgia House voted March 7 against House Bill 198, which proposed to change the regulations by which hospitals are allowed to build and expand facilities.

House leaders declined to bring the bill up for a second vote that day, although members had voted to authorize a second vote on it, according to House voting records.

The House decision to reject the bill means that it cannot be considered again this year; it can be presented again for a vote in the 2020 legislative sessions. The provisions of HB 198 could be attached to any related legislation is still viable this year.

Each member of Atlanta’s House delegation voted against HB 198, with the exception of Rep. “Able” Mable Thomas (D-Atlanta) who was excused from voting, according to House records.

 

David Pendered, Managing Editor, is an Atlanta journalist with more than 30 years experience reporting on the region’s urban affairs, from Atlanta City Hall to the state Capitol. Since 2008, he has written for print and digital publications, and advised on media and governmental affairs. Previously, he spent more than 26 years with The Atlanta Journal-Constitution and won awards for his coverage of schools and urban development. David graduated from North Carolina State University and was a Western Knight Center Fellow. David was born in Pennsylvania, grew up in North Carolina and is married to a fifth-generation Atlantan.

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