Palomar Health's Fitch rating falls further into junk

Palomar Health's ongoing fiscal woes caused its bond rating to fall further into junk territory, with Fitch Ratings dropping the rating to B-minus from B.

Fitch revised the negative watch on the San Diego-area system to a negative outlook, citing the "persistent and severe challenges Palomar (PLMR) still confronts as management navigates significant financial stress and uncertainty."

The downgrade reflects Palomar's (PLMR) financial pressures over the past 18 months as the organization addresses various financial challenges, Fitch analysts wrote in Friday's ratings report.

Palomar (PLMR), a two-hospital system, reported a $165.1 million operating loss in fiscal 2024, which ended June 30, and an operating loss of $65.5 million for the first half of fiscal 2025.

Fitch did note, however, that Palomar's (PLMR) negative 12.2% operating margin is an improvement over the negative 20.9% operating margin it notched at its low point in 2024.

Ratings on the 2016 and 2017 refunding bonds; series 2007A, 2009A, and 2010A general obligation bonds; and series 2017 and 2021 certificates of participation issued by the California Municipal Finance Authority and 2022 taxable and tax-exempt COPs were downgraded to B-minus from B.

Fitch downgraded its series 2016A unlimited tax GO bonds to BB-plus from BBB-minus. These bonds were rated higher, because Fitch's assessment that the pledged revenues for repayment of these bonds meets the definition of "pledged special revenues," under the U.S. bankruptcy code, which warrants the five-notch spread.

Palomar (PLMR) successfully "negotiated and finalized a forbearance agreement with outstanding debtors for a one-year period that expires in January 2026," Fitch analysts wrote. It's annual financial covenants outlining days cash-on-hand requirements are waived through this forbearance period, Fitch said.

Fitch's latest downgrade comes a month after Moody's Ratings lowered Palomar's (PLMR) rating to Caa1 from B2 citing high expenses, large physician subsidies and an increasing governmental payer will continue to challenge performance.

Both ratings agencies also downgraded Palomar's (PLMR) ratings in 2024. Moody's downgraded its rating to B2 from Baa3 in October. Fitch downgraded the system to B from BB-plus in December.