Firm lowers rating on U.'s bond issues

Moody's Investor Service announced yesterday that it would downgrade $350 million in outstanding University debt because of the Penn Health System's ongoing financial difficulties. The move dropped the debt's rating -- a measure of the likelihood that a bond issue will be repaid in a timely fashion -- from Aa2 to Aa3, and maintained a negative outlook on the debt, indicating Moody's belief that further downgrades may be made in the future. A lower bond rating makes it harder for an institution to raise capital by signaling an increased risk to investors. Higher interest rates result, also making it more expensive for the institution to pay back the money it borrows. While an Aa3 rating remains "high grade," a reflection of Penn's overall financial stability, Moody's --Ea New York-based bond-rating firm -- said its action reflected growing concern about the impact of the Health System's recent budget deficit on the University as a whole. "Moody's believes that pressures on the University's clinical enterprise are likely to result in strains on the University's overall operating performance at least for the next several years," the rating service said in a press release. The move came despite Penn's overall fiscal health, Moody's said, citing strong demand among prospective students and a growing endowment. University Vice President for Finance Kathy Engebretson emphasized the same point, noting that "the only reason" for the downgrade in the debt rating is Health System's continued financial difficulties. She noted that the Health System -- which encompasses over 50 percent of the University's revenue base -- is currently working in "arguably the most competitive" healthcare market in the country. "Moody's has a negative outlook on every health system in Philadelphia," Engebretson said. The current financial difficulties at area health systems stem from the complicated nature of Philadelphia's healthcare market. Two insurers control 80 percent of the market, allowing them to dictate levels of payment to area hospitals. Recent cutbacks in Medicare and Medicaid have also placed area systems under severe financial pressure. As a result of these and other pressures, the Health System ran up a nearly $90 million operating deficit for Fiscal Year 1998. And according to Moody's, over the next several years the Health System is "likely to achieve at best break even operations, and possibly moderate operating losses." But Health System officials continue to maintain that they will return to profitability by fiscal year 2000. And Engebretson said that despite Moody's unfavorable evaluation, the goal may still be achieved. "In [Health System Chief Executive Officer William] Kelley's 10-year history, he has never exceeded his budget," she said, adding that she has "confidence in the management of the [Health System]." In addition to the Pennsylvania Hospital and the Hospital of the University of Pennsylvania, the $2 billion Health System includes the Presbyterian Hospital at 39th and Market streets and the Phoenixville Hospital in Phoenixville, Pa. The system, which employs 18,000 people,Eis also affiliated with 12 other hospitals and controls 20 percent of the Philadelphia health care market. Despite the challenges faced by the Health System, the University continues to grow stronger financially with increases in applications and growth in research awards. Moody's predicted that "academic operations will remain strong due to ongoing growth in tuition and gift revenues, favorable expense management and close integration of the University's operating and capital projects with its long term plan." The downgrade specifically affected $350 million in debt issued through the Pennsylvania Higher Education Facilities Authority. Last summer, Moody's downgraded the status of the Health System's own bonds from Aa3 to A1 in the midst of a regional crisis in the healthcare market heralded by the bankruptcy of the Allegheny Health System, one of Penn's main competitors.

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