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Cone Health’s plan to acquire Randolph Hospital already is having a negative influence on its credit ratings.

S&P Global Ratings revised May 1 its outlook to negative from stable, but affirmed its “AA” rating on the Greensboro health care system’s N.C. Medical Care Commission bonds.

On June 1, Cone entered into a management services agreement with the Asheboro hospital, which has remained independently owned and governed by its board of directors.

“The negative outlook reflects the gradual deterioration of Cone Health’s financial profile over the past several years, as well as its plans to issue $100 million in additional debt in 2018 and a potential merger with Randolph Hospital,” analyst Jennifer Soule wrote.

Soule cited that Randolph Hospital “has historically carried operating losses.”

She said the decision to maintain the “AA” rating “reflects Cone Health’s robust enterprise profile, highlighted by its dominant market position and growing volume, and financial profile that is light compared with our expectations for the rating level.”

Cone has acquired Alamance Regional Medical Center and Annie Penn Hospital in recent years. Cone itself operates under a management contract with Carolinas Healthcare System of Charlotte.

Cone has said it has a goal of improving its operating margins to 3 percent to 4 percent, starting in fiscal 2018. Its capital plan includes $561 million in spending from fiscal 2017 to fiscal 2020.

“Management intends to fund the majority of the plan through operating cash flow, although the debt issuance noted above is an option it will likely pursue to preserve the growth of its unrestricted reserves,” Soule wrote.

“To issue the additional debt and maintain the current rating, Cone Health will need to meet or exceed its operating margin targets through the next two fiscal years, all while maintaining its other balance sheet and enterprise strengths.

“We could consider a lower rating through the two-year outlook period if Cone Health moves forward with additional debt plans and does not meet its operating margin targets across that timeframe.”

Soule said that “a positive outlook and higher rating are unlikely for Cone Health through the outlook period given that its current financial metrics are light compared to our expectations for the ‘AA’ rating level.”

Jeff Jones, Cone’s chief financial officer, said in a statement that the change to a negative outlook “is not unexpected as Cone Health is heavily involved in multiple long-term investments to not only improve health care in the communities we serve, but to change the way we provide that care.”

Among the changes Jones cited include moving women’s services to Moses Cone hospital and building new operating rooms. Cone is evaluating investments in our behavioral health network and our physician network to improve access.

Jones said that Cone, like many regional hospitals, has had its revenue stream reduced in part from successful community-health initiatives, such as reducing the number of patients seeking care for heart failure and obstructive pulmonary disease.

“These programs reduce the number of people coming into our hospitals, which in turn impacts our revenue, but are certainly the right thing for us to do for our patients,” Jones said.

“We strongly believe that as our nation struggles with ever-higher health costs, our approach will become the standard for health networks across the country.”

Jones stressed that Cone’s capital investments will not be affected by the negative outlook, and that just “24 nonprofit health networks nationwide enjoy the AA or higher rating from S&P that Cone Health has.”

“We continue to be rated AA stable by Fitch Investors Service. Cone Health remains among the financially strongest health care organizations in the country.”

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rcraver@wsjournal.com 336-727-7376 @rcraverWSJ

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