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S&P downgrades its outlook for RGHS over merger

Rochester Business Journal
April 29, 2014

Standard & Poor's Ratings Services on Tuesday revised its outlook to negative, from stable, on bonds issued for Rochester General Hospital, citing the expected impact of the proposed merger of Rochester General Health System with Unity Health System.

The ratings service affirmed its A- rating on the Monroe County Industrial Development Corp., N.Y.'s series 2013A and 2013B bonds issued for RGH. Its ratings reflect RGHS as a whole.
"The negative outlook reflects our opinion of the dilutive effect that a  proposed merger with Unity Health System will likely have on Rochester General's financial profile should the merger close in late 2014," Standard & Poor's credit analyst Charlene Butterfield said in a statement.

"It is our view that Rochester General's balance sheet is not sufficiently robust at the current rating to accommodate Unity Health's significant debt load of roughly $300 million, as Unity Health contributes little in the way of unrestricted reserves that do not offset its high debt level," Butterfield added.
The affirmation of the A- rating reflects Rochester General's solid business position in a competitive market, revenue diversity highlighted by a large physician partnership organization and senior living services, and a record of sound profitability, Standard & Poor's said.

"In our opinion, Rochester General's increasing profitability provides an adequate offset for some aspects of its balance sheet that we consider weak for the rating," Butterfield said.

“Without the dilution of the proposed merger with Unity Health, we believe that Rochester General's overall financial profile would be likely to gain strength during the next year or two, given cost controls and greater capacity.”

Should the Unity Health merger close, and system-level financial results are below medians for the rating, the service could lower the rating, Standard & Poor's said. The service does not view a positive outlook or higher rating as likely during the next one to two years.
Mark Clement, president and CEO of RGHS, said in a statement that March, Standard & Poor’s upgraded RGHS to an exceptional A- credit rating.

“Today, the agency reaffirmed our A- rating, though it revised our outlook,” Clement said. “The change made by S&P is a typical and expected shift based on the size of the upcoming Unity Health System merger.

“It’s a common practice for credit rating agencies to lower outlook expectations for organizations involved in pending merger transactions until they are able to accurately evaluate the sustainable financial position of the newly formed entity,” he said. “The anticipated S&P outlook shift in no way alters our sense of confidence and enthusiasm about the identified financial opportunities for the new system, or the anticipated benefits that the merger will bring to our community and patients throughout the region.”  

Warren Hern, president and CEO of Unity Health System, said in the statement that the system is strong financially and clinically, and has made considerable capital improvements during the last several years.  

“Unfortunately, S&P was only able to evaluate Unity’s public documents and filings, consisting of our 2012 audited financials—giving them a very limited view of the overall positive impact that Unity’s complementary geographic profile, services, staff, assets and facilities will bring to the merger.”

(c) 2014 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail

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