Welltower, ManorCare Deal Could Cost ProMedica Its A+ Credit Rating

Standard & Poor’s is contemplating a downgrade of ProMedica Health Systems’ credit rating, in light of the nonprofit’s acquisition of struggling skilled nursing giant HCR ManorCare. That transaction—a joint venture with real estate investment trust Welltower (NYSE: WELL)—closed last week.

While asserting that the non-profit health system still has an A+ rating for its long-term debt, S&P expressed concerns about the way ProMedica funded the transaction—as well as the hospital system’s general lack of experience in the skilled nursing world.

“We note a downgrade of more than one notch is possible, given the significant additional debt and cash usage to fund the acquisition,” the ratings agency noted in an update released July 26. “In addition, the transaction involves other risks, including integration, and expansion into a new business sector that has faced significant challenges.”

Trade publication The Bond Buyer, which tracks the bond markets, originally reported the S&P commentary on Monday, a few days after noting a similar action by Moody’s  — which placed ProMedica’s A1 rating under review for a possible downgrade last week.

S&P had previously placed ProMedica’s debt into the “CreditWatch Negative” category—giving it a 50% chance of an eventual downgrade—back on April 26, the same day the chain’s mega-deal to acquire ManorCare out of bankruptcy was announced. In a concurrent transaction, ProMedica also teamed up with real estate investment trust (REIT) Welltower Inc. (NYSE: WELL) to purchase the assets of Quality Care Properties, another REIT that had been ManorCare’s primary landlord.

Welltower pegged the entire value of the joint transaction at $4.4 billion; ProMedica’s standalone acquisition of ManorCare was funded with $470 million in cash and a $1.15 billion bridge loan from Barclays, according to S&P.

The REIT’s management frequently cited ProMedica’s solid credit rating as a reason why they felt comfortable entering into a major skilled nursing transaction.

“If you’re going to look at this as a SNF deal, you’re missing the whole underpinning of why we’re doing this,” Welltower CEO Tom DeRosa told Senior Housing News back in April, when news of the transaction first broke. “We would never have bought this real estate from QCP except in a joint venture, as we’ve structured it, with an A-rated health system that will be our operating partner as well as our real estate partner.”

Despite the warning, S&P did allow that the ManorCare purchase could have some significant upsides for ProMedica.

“However, we recognize many of the benefits that HCR ManorCare could provide to ProMedica, including diversification into the post-acute care space, potential cash-flow contributions, and possible synergies as well as the expected restructuring of some of HCR ManorCare’s existing liabilities,” S&P wrote.

S&P analysts plan to meet with ProMedica’s management team and issue a formal resolution of its “CreditWatch Negative” classification by the end of August.

Written by Alex Spanko