The Junk-rated Pennsylvania nonprofit regional healthcare system, Tower Health, is embarking on a journey to exchange outstanding debt and issue new bonds as part of its efforts to bring about a successful turnaround. Through the Berks County Municipal Authority, Tower Health plans to issue $1.335 billion of revenue bonds, with the aim of exchanging $1.178 billion of debt for new bonds. The primary goal of this restructuring is to provide Tower Health with the flexibility and breathing room it needs to address its challenges and steer clear of a potential bankruptcy scenario.
Tower Health’s interim vice president, Treasury, Jordan Melick, highlighted the positive impact of the actions taken by the organization, which have contributed to improved financial performance. While fiscal 2023 results showed an operating loss of $182.1 million, the operating loss for the first three quarters of fiscal 2024 narrowed to $17.8 million. Additionally, Tower Health achieved its first profitable quarter in five years during the second quarter of 2024 and is on track to break even for the year. These signs of progress are encouraging, indicating the effectiveness of the strategies being implemented by Tower Health.
Tower Health’s liquidity was noted to be lighter than expected, and upcoming mandatory tenders were looming on the horizon, creating financial challenges for the organization. In an effort to address these issues, Tower Health opted for a debt restructuring plan that involves cashing $157.5 million in taxable and tax-exempt bonds to fund working capital, capital improvements, and various costs. The remaining portion of the transaction comprises an exchange of outstanding debt, which is set to expire on September 13. This strategic move aims to enhance Tower Health’s financial position and provide the organization with the flexibility needed to execute its turnaround plans effectively.
Over the years, Tower Health has encountered a series of challenges stemming from a multi-billion-dollar bond-backed expansion, integration issues following a merger in 2017, and the disruptive impact of the pandemic. The organization’s struggles were further compounded by attempts to divest assets and navigate through the complexities of the healthcare industry. The closure of two hospitals and the sale of another underscored the difficulties faced by Tower Health in achieving its strategic objectives.
Tower Health’s credit ratings went through a series of downgrades, with S&P rating it as investment-grade BBB-plus before downgrading it to speculative grade BB-plus during the height of the COVID-19 pandemic. Subsequent downgrades culminated in S&P lowering Tower Health’s rating to CC following the announcement of the debt refinancing plan. While Fitch does not view the proposed deal as a distressed debt exchange, the organization affirmed its CCC rating on the outstanding debt. Despite differing views from credit rating agencies, the debt restructuring plan signifies Tower Health’s proactive approach to addressing its financial challenges and enhancing its financial flexibility.
As Tower Health moves forward with its debt restructuring plan, the organization is focused on achieving sustainable financial stability and operational excellence. By leveraging the proceeds from the new bond issuance and the exchange of outstanding debt, Tower Health aims to strengthen its financial position, improve liquidity, and successfully navigate the evolving landscape of the healthcare industry. The road to recovery may be challenging, but with strategic planning and decisive actions, Tower Health is poised to emerge stronger and more resilient in the face of adversity.