St. Charles Parish Hospital in Luling, La., became the latest hospital district to feel the sting of Standard & Poor’s decision earlier this year to revise its criteria for tax-secured, general-obligation hospital debt.
The S&P’s move resulted in some huge drops in debt ratings and could threaten the affected hospitals’ ability to borrow in the capital markets.
“They have downgraded the bonds to the lowest level that you could rate a bond,” said Fred Martinez, chief executive officer at 40-bed
St. Charles for nearly 23 years. “That’s basically junk bonds,” he said, adding that the rating could limit the hospital’s ability to sell bonds in the future. S&P placed St. Charles on credit watch in May and downgraded the hospital’s bond rating by six notches to B- from BBB- last week. It also reduced the hospital’s outlook to negative.
Announced by S&P in May, the criteria change increased the focus on the credit quality of a hospital while still taking into account traditional tax-secured analysis. While one S&P analyst said the change is a “more focused approach,” some providers say it’s unfair. The change resulted in lowered ratings for 11 hospitals.
“In the past, we have looked at the tax base and operations because the operations could have jeopardized the solvency” of a hospital, said Gabe Petek, a director with S&P in San Francisco. “Now, if the operations itself are of a sufficiently weak credit quality, the focus on property tax base alone is insufficient.”
In the case of St. Charles—which is designated as a rural hospital—the hospital has grown, but it has not seen a significant change in its bottom line, according to Martinez. Revenue was about $24 million in fiscal 2005, $31 million in fiscal 2006 and $28 million for fiscal 2007, which ended July 31.
But Martinez contends that St. Charles’ bonds are not tied to the profit and loss of the hospital. Because it does not have revenue bonds, but rather general-obligation, or GO, bonds tied to property taxes, the hospital services district—legally known as St. Charles Parish Hospital Services District No. 1—would still be able to levy taxes to service the bonds even if the hospital had to close its doors.
Martinez also said that the hospital has used money from its GO bonds on information technology enhancements and capital expenditures. But as Rob Williams, an analyst with S&P in San Francisco, explains, St. Charles had to rely on borrowed funds to do so. “The reality is that operationally, they have no cushion,” Williams said. “They have no ability to respond to any uncertainty. A stronger district with a higher rating would have stronger operating performance and less reliance on borrowing.”
According to Williams, the criteria change was prompted by the rating agency’s observation that some small hospitals that receive property tax support and issue debt had considerable financial trouble and filed for bankruptcy.
“Our concern is that if a hospital district files bankruptcy for any purpose, it’s uncertain whether payments to bondholders would be interrupted,” Williams said.
Analysts for other credit ratings agencies said they, too, consider operations when rating tax-backed hospital districts. “It’s a case-by-case analysis,” said Lisa Goldstein, senior vice president and team leader of the healthcare division at Moody’s in New York. “The first is the tax review—they lead the charge in the review,” she said, adding that Moody’s rating of St. Charles Parish Hospital Services District No. 1 is Baa2, which is an investment-grade rating.
Jeff Schaub, senior director in the healthcare group at Fitch in New York, agreed that hospitals should be evaluated case by case. Fitch rates about a dozen hospital districts, all of which are “typically strong” financially, Schaub said. As he sees it, S&P’s criteria change recognizes that if a hospital has fiscal problems and files bankruptcy, there is no structure to protect the financial flow. “Underlying operations always need to be considered,” Schaub said.
Barbara Jennings, chief financial officer at 32-bed Sierra Kings District Hospital in Reedley, Calif., said that the S&P criteria change uses an approach that is beyond ultraconservative. S&P lowered the bond rating for Sierra Kings to B from BBB- in May.
