LOUISVILLE, Ky. (WDRB) – Debt rating agency Moody’s Investors Service downgraded its rating on the University of Louisville’s debt this week, citing risks associated with the university’s big foray into healthcare.
Earlier this month the university’s healthcare arm, U of L Health, absorbed Jewish Hospital and KentuckyOne Health’s other Louisville properties – in all, four hospitals, four outpatient centers and a 280-physician practice group.
Explaining the downgrade in a note dated Monday, Moody’s analysts expressed concerns about the university getting into a cash crunch given the its “significantly increased exposure” to health care.
“These (KentuckyOne) assets, which have had significant operational and financial difficulties in recent years under their former management, come with little liquidity and significant capital needs that add credit challenges,” Moody’s said.
The rating agency lowered its opinion of U of L’s creditworthiness one notch, from to Baa1 from A3. It also assigned a “negative” outlook, citing the possibility that U of L would “not (be) able to make targeted progress on health system integration and financial turnaround” and noting U of L’s “limited cushion to respond to any additional adverse events.”
U of L chief financial officer Dan Durbin played down the significance of the Moody’s action, noting that competitor rating agency Standard & Poors reaffirmed its opinion of U of L’s debt in recent weeks.
Between the two agencies, it’s “kind of a split decision” as to whether KentuckyOne takeover affects the university’s creditworthiness, Durbin said.
He added that the Moody’s action will have no “material impact” on U of L’s borrowing costs when it next raises debt in the spring of 2020 to build residence halls.
Durbin said Moody’s raised valid issues about the KentuckyOne deal, but U of L officials are confident they can handle the challenges.
“There is risk in everything and those risks that Moody’s mentioned are no different than those risks that we looked at ourselves as we sat across the table and decided to do the KentuckyOne acquisition,” he said.
The KentuckyOne deal, which closed Nov. 1, about doubled the size of U of L’s healthcare enterprise, putting it among the nation’s 20 biggest academic medical centers owned by public universities and right on par with the University of Kentucky’s health system.
U of L officials have said it will take three years to stabilize the finances of the KentuckyOne system, which loses about $50 million a year, and that they need help to cover operating losses during the transition.
The biggest component of U of L’s plan is still not guaranteed: a $50 million infusion of tax dollars from state government.
While the request has been described as a loan, the university would have to pay back only half -- $25 million – and payments wouldn’t start for five years. Then, U of L would have 15 years to repay the $25 million.
While the leaders of the Republican-controlled state House and Senate have endorsed the $50 million plan, the legislature as a whole must approve it in the 2020 session, which begins in January.
What happens if the money doesn’t come through? U of L President Neeli Bendapudi told reporters on Tuesday that it would be “very difficult” for the university, but she was not specific.
“We would scramble. What it would really mean is that our capacity to turn (the KentuckyOne system) around would be extended. We’d have to work a lot longer and it would hurt the state and it would hurt the university,” she said.