Thanks in part to the Health System's first profitable year since 1997, Moody's Investors Service has upgraded the outlooks on the bond ratings for both Penn and Health System.
The investment service announced yesterday that although the A1 rating for the University and the A3 rating for the Health System would remain the same, the outlook on the bonds would improve from negative to stable.
The highest bond rating that an institution can receive is Aaa, followed by Aa1, Aa2 and Aa3. The lowest ratings in the A category are A1, A2 and A3. The rating system has a similar structure in the B and C categories as well.
"What the negative outlook suggests is the possibility of a further downgrade," Moody's analyst Lisa Martin said. "The stable outlook really reflects our confidence in the management team."
After large financial gains in the mid 1990s, the Health System spiraled deep into debt in the late '90s, causing the University's overall bond rating to drop from Aa2 to A1 over a five-year span. Last February, the University announced plans to convert the Health System into a separate not-for-profit entity to help prevent further financial trouble.
The bond ratings for Penn and the Health System are recommended to a panel of experts by two analysts and a senior credit officer from the investment service.
In their report, the analysts cited "substantial progress... in producing an operating profit, reversing a history of large operating losses, stabilizing liquidity and implementing more consistent financial practices and more stringent financial controls" as reasons for the revision.
According to Moody's, the Health System has approximately $825 million of outstanding debt, while the University has $560 million of debt. Some of each sum does not fall under the same bond rating system.
Vice President for Finance and Treasurer Craig Carnaroli said the investment service made the change because they were pleased with the direction in which the Health System is headed.
"I think part of it is that enough time has passed to give them confidence that the Health System turnaround is in hold," Carnaroli said. "It's an important signal from an external evaluator of us of the progress we've made financially."
According to Martin, Penn's bond rating remains lower than many of its peer institutions partly because of the risks involved with having the Health System directly tied into the University. The Health System comprises 53 percent of the total revenues of the University.
Harvard and Yale universities have Aaa ratings, the highest possible, but they also maintain separate health care entities.
The analysts from Moody's have quarterly discussions with the management from both the University and the Health System. They evaluate the progress made in the finances of both institutions at the end of each fiscal year.
In their report, the Moody's analysts noted the financial turnaround that the Health System made over the past year as reason to improve the bond's outlook.
"For fiscal year 2001, ending June, UPHS demonstrated remarkable improvement in operating performance, which we believe is sustainable," the report reads. "The system benefited in Fiscal Year 2001 from both revenue growth and cost containment."
According to Carnaroli, the next step for the University's ratings could be a shift to a positive outlook or even a higher overall rating.
The investment service cited the Health System's short-term cash requirements, modest cash position and other expense pressures as reasons for not upgrading the overall bond rating for the Health System. The analysts also noted in their report that generating enough cash flow to support capital requirements may prove to be a challenge for the once-beleaguered system.
In justifying the overall improvement for the University, the analysts cited expanding research, increased fundraising and a large financial resource base.
"Looking forward, we see a lot of positive momentum at the University," Martin said.Comments powered by Disqus
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