Tower Health receives another credit downgrade ahead of closing St. Christopher’s acquisition

Tower Health, which this month is expected to complete the $50 million acquisition of St. Christopher’s Hospital for Children in a joint venture with Drexel University, received an unusually harsh three-notch credit downgrade from Fitch Ratings.

The downgrade to BBB from A reflects Tower’s "challenges in integrating the five acute care hospitals acquired from Community Health Systems (CHS) in the fall of 2017,” Fitch said Wednesday.

An $86 million write-down of accounts receivable in the year ended June 30 and other operational problems at the five hospitals in Chester, Montgomery, and Philadelphia Counties have “placed Tower’s current operations and balance sheet in a more precarious position than what was first anticipated” when the $418 million deal closed, Fitch said.

The acquired hospitals — Brandywine in Coatesville, Chestnut Hill in Philadelphia, Jennersville Regional in West Grove, Phoenixville in Phoenixville, and Pottstown Memorial Medical Center in Pottstown — have 753 beds, giving Tower a total of 1,468, including its flagship Reading Hospital in West Reading.

Tower had $1.75 billion in revenue and a loss from operations of $178 million. The system’s debt stood at just under $1.2 billion on June 30.

Fitch gave Tower a stable outlook, and said that despite the struggles, the expansion was meeting many of the system’s goals. Tower has become one of the largest health systems in Southeastern Pennsylvania and seen an increase in the number of patients transferred to it for higher-level care, Fitch said.

The Fitch downgrade is Tower’s second this fall. In October, Moody’s downgraded Tower’s credit rating by two levels and maintained its negative outlook.

“The downgrade to Baa2 from A3," Moodys wrote, "reflects the culmination of several challenges including declining volume trends, higher-than-anticipated losses at the physician group, disruptions from a major IT implementation and challenges integrating the acquired hospitals.”

In August, Tower dropped Moody’s as a credit-rating agency, saying its agreement with bondholders requires it to work with only two credit-ratings agencies. Issuers of municipal bonds pay the major credit-ratings agencies (Standard & Poor’s is the third) for the ratings.

The sales agreement that Tower and Drexel signed in September, to purchase St. Chris, calls for the transaction to close by Dec. 15.