Fitch Ratings has downgraded Rhode Island Health and Educational Building Corporation’s $18.6 million series 1999 revenue bonds (St. Joseph Health Services of Rhode Island Issue; SJHS) to ‘BB’ from ‘BBB-‘. Fitch has also revised the Rating Outlook to Negative from Stable.
The downgrade reflects SJHS’ growing operating losses, a rapidly shrinking liquidity position, and poor debt service coverage. The financial deterioration is a result of the hospital’s inability to respond effectively to a multi-year decline in inpatient and outpatient volumes. Since fiscal 2004, SJHS’ operating performance has consistently worsened, with the hospital losing $3.4 million for the year ending Sep. 30, 2007 (negative 1.9% margin). Through six months ended March 31, 2008, SJHS recorded an operating loss of approximately $1.8 million, which equated to a negative 2.0% operating margin. Management projects the full year loss to be $3.6 million, despite having implemented a 40 FTE staff reduction in April 2008. Despite the losses, SJHS’ debt load is moderate, with maximum annual debt service at just 1.6% of revenues, cash to debt at 94%, and debt to capitalization at 40%.
SJHS’ cash and unrestricted investments have steadily declined since 2005, and stood at 38 days of expenses as of March 31, 2008. At Sep. 30, 2007, SJHS had approximately $22.5 million in unrestricted cash and investments, which was down from FY06 and FY05’s positions of $30.8 million and $34.0 million, respectively. Cash flow from operations turned sharply negative for fiscal 2007, while investment losses have further trimmed the hospital’s liquidity position. Moderate but prolonged erosion in patient volumes is chiefly responsible for the financial decline, with admissions dropping over 2% per year since 2004. Outpatient activity has also dropped, with surgeries declining to 14,295 for fiscal 2007 from 18,645 in 2003. Management indicates that recent utilization declines are due to softening inpatient volumes throughout the state as well as growing outmigration and competition for surgical services.
The Rating Outlook revision to Negative indicates that potential further negative rating action may be warranted if SJHS’ cannot improve operating profitability and stabilize its liquidity position.
Management expects to reduce expenses through two near term initiatives. First, SJHS eliminated 40 full time equivalent positions in April 2008, and management is reviewing additional expense savings measures as part of the FY2009 budget process. Second, the hospital has filed a certificate of need application to allow the consolidation of inpatient services at the newer of the hospital’s two campuses in Providence. Approval and implementation is expected over the next several months. The projected benefit of the inpatient consolidation is $4.2 million.
SJHS is also contemplating a merger with Roger Williams Medical Center, (RWMC) similarly sized and also located in Providence, which could strengthen SJHS’ market presence and reduce expenses through streamlined business operations. Pursuant to a May 2008 memorandum of understanding, both organizations would consolidate under a parent organization. The combined entity would have approximately $340 million in revenues and a 15% market share. Details regarding the management team and obligated group structure have yet to be determined. For the year ended Sep. 30, 2007, RWMC broke even from operations on net revenues of $168 million.
Located in Rhode Island, SJHS consists of 271-bed Our Lady of Fatima Hospital in North Providence, St. Joseph Hospital for Specialty Care (115 beds) and St. Joseph Living Center (62 assisted living units) in Providence. SJHS had $177.6 million in total revenue in 2007. SJHS has covenants to provide only annual disclosure to the NRMSIRs, which Fitch views as a weak legal covenant. SJHS has provided timely annual disclosure to the NRMSIRs and management intends to provide quarterly disclosure.
Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.
Comments