NEW YORK --(Business Wire)--As part of its ongoing surveillance review process, Fitch Ratings has downgraded the following bonds issued by the Rhode Island Health and Educational Building Corporation, on behalf of St. Joseph Health Services of Rhode Island (SJHS) to 'B' from 'BB-'.
--$18.8 million series 1999.
The Rating Outlook is Stable.
RATING RATIONALE:
--The downgrade reflects a decline in SJHS' financial performance since Fitch's 2009 review characterized by continued operating losses, very weak liquidity, material declines in patient volumes, and poor debt service coverage.
--After losing $19.9 million in fiscal 2010 (negative 12.4% operating margin), losses have been reduced but are still negative at $1.7 million (negative 2.6% operating margin) through five-months, Feb. 28, 2011 (unaudited).
--At Sept. 30, 2010 (audited year-end) SJHS' liquidity ($6.4 million in unrestricted cash and investments) reached critically low levels with days cash on hand (DCOH) of just 14.3, a 2.2 times (x) cushion ratio, and 35.4% cash to debt. Interim figures show a strengthening of liquidity but figures remain at low levels.
--SJHS had a rate covenant violation in fiscal 2010 and maximum annual debt service (MADS) coverage remains weak at 1x through the five month interim period.
--Inpatient admissions have declined 18% since fiscal 2008 falling to 8,541 in 2010 from 10,426. Further, outpatient surgeries demonstrated a similar trend decreasing to 11,724 in 2010 from 13,316 in 2008.
--SJHS has a relatively light debt burden as MADS ($2.8 million) represented 1.8% of total revenues in 2010.
KEY RATING DRIVERS:
--SJHS' January 2010 affiliation with Roger Williams Medical Center (RWMC) to form CharterCare Health Partners (CharterCare) continues to yield benefits around consolidated clinical and administrative services, expense savings and revenue cycle initiatives.
--Expectation that interim financial position will be sustained and/or improved. Deterioration in financial profile and volumes could lead to further rating pressure.
SECURITY:
The bonds are secured by a pledge of SJHS gross receipts and real estate.
CREDIT SUMMARY:
Located in Rhode Island, SJHS consists of 359-bed Our Lady of Fatima Hospital in North Providence. In 2010, SJHS had $161.6 million in total revenue.
The rating downgrade to 'B' reflects SJHS' weakened financial position since Fitch's last review in 2009. Specifically, SJHS recorded a negative 12.4% operating margin and negative 7.9% operating EBITDA margin in fiscal 2010. The operating loss was due to continued volume losses, a handful of one-time expense items (a $3.5 million receivable write down, $4.9 million malpractice reserve adjustment, and $1.2 million in severance payments), and additional expense items that came in above budget. In total, SJHS lot $19.9 million in fiscal 2010 and violated its debt service coverage covenant. However, management has implemented an action plan, which includes several revenue cycle initiatives and numerous expense reduction programs. As of Feb. 28, 2011, SJHS lost $1.7 million from operations (negative 2.6% operating margin and 1.8% operating EBITDA margin), which is improved from fiscal 2010, but nonetheless weak.
Additional negative credit factors include SJHS' balance sheet, debt service coverage, volume trends, and ability to fund future capital expenditures. SJHS has a weak balance sheet that had 14.3 DCOH, 2.2x cushion ratio, and 35.4% cash to debt in fiscal 2010. However, through February 2011, liquidity indicators improved slightly to 22.8 days, 3.2x, and 53.2% cash to debt. After violating its debt service coverage covenant in 2010, SJHS had MADS coverage 1x through the February 2011 interim period. Over the past four fiscal years, debt service coverage has averaged a negative 0.3x, which is low in comparison against Fitch's other rated nonprofit healthcare borrowers. In fiscal 2010, SJHS spent $2.7 million on capital, which equated to 45% of depreciation and was unfavorable compared against the median of 66.2%.
On Jan. 4, 2010, SJHS signed an affiliation agreement with RWMC and formed CharterCare. Operating with a new management team, Fitch views SJHS' affiliation as a credit positive. Although the affiliation is not a full merger and SJHS maintains its own debt, management has identified approximately $28 million in savings from the new organization that is benefiting SJHS. Benefits from the affiliation have already been realized through the streamlining of services and administrative functions. Over the medium term, management anticipates further savings to come from additional consolidation of services, expense efficiencies, and benefits stemming from new information technology systems. Additionally, there are other potential strategic benefits that could improve the revenue for both organizations.
Other credit strengths include SJHS' manageable debt burden as reflected in MADS as a percentage of revenue of 1.8% in fiscal 2010 and its conservative debt structure with all fixed rate debt.
The Stable Rating Outlook reflects Fitch's expectation that SJHS will benefit from its organizational changes and maintain a financial profile adequate for the current rating level. Negative rating pressure may be warranted if losses increase again or balance sheet metrics decline further. Management has a breakeven goal for operations in fiscal 2012, which would be a major milestone, and anticipates annual capital expenditures to range from $5 million to $7 million.
Disclosure: SJHS covenants only to disclose annual audited financial information to EMMA, which Fitch views as a weak legal covenant.
Additional information is available at www.fitchratings.com
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
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