Fitch holds Palomar rating at B-minus on JPA progress

Fitch Ratings held the line at a B-minus junk rating and negative outlook for Palomar Health, an Escondido, California-based hospital system, citing its progress in formation of a joint powers authority with the University of California San Diego Health.

Palomar (PLMR) operates two hospitals and a nursing home in northern San Diego County. It is the largest public healthcare district and trauma center in the state.

It has roughly $738 million of revenue bonds outstanding and $621 million in outstanding general obligation bonds, as of fiscal year-end 2024.

On Tuesday, Fitch also affirmed its B-minus underlying rating on Series 2016 and 2017 refunding revenue bonds, Series 2007A, 2009A and 2010A general obligation bonds and four series of certificates of participation and affirmed its BB-plus on the unlimited tax GOs.

Both Fitch and Moody's Ratings downgraded the hospital's bond ratings to junk in 2024 after it reported $165 million in operating losses for the 2024 fiscal year ended June 30.

In February, Moody's further downgraded its revenue ratings to Caa1 from B2 and its general obligation unlimited tax ratings to Ba1 from Baa3 and revised the outlook to negative from rating under review.

Palomar (PLMR) entered a forbearance agreement with Assured Guaranty (AGO) and Sharp HealthCare in January on its bond debt after it experienced significant financial losses, causing the district to breach its financial covenants on more than $700 million in revenue bond debt. The agreement lasts until January 2026 with an option to extend another year, subject to Assured's approval.

The operating loss meant Palomar (PLMR) failed to meet bond covenants, which would have triggered accelerated payments without the forbearance agreement, and could have landed the hospital system in bankruptcy court.

At that time, it also announced plans to form a JPA with UC San Diego Health. UCSD Health has agreed to provide $90 million in a line of credit and potentially forgivable loans, Fitch said.

"Fitch recognizes the JPA still requires final approvals, but views the significant interim steps favorably and as contributing factors supporting affirmation at B-minus," analysts said in the report. "If final approvals are granted over the next several months, Fitch expects further synergies between the organizations, a credit positive."

The synergies Fitch cited include creating a comprehensive cancer center, building out shelled space at Palomar's (PLMR) Escondido campus, developing and expanding service lines, and eventually updating Palomar's (PLMR) electronic medical record platform.

UCSD aims to shift some patient volume away from its crowded La Jolla medical campus ? home to facilities like Jacobs Medical Center. Palomar (PLMR) expects to improve its strained financial situation by taking on more patients.