Moody's dropped the debt rating of East Texas Medical Center Regional Healthcare System to speculative grade, saying the hospital company needs to change its operating trajectory to avoid putting bond covenants at risk in early 2018.
Moody's downgraded East Texas five notches from Ba1, which is just below investment grade, to B3, a speculative rating indicating high risk. Moody's outlook on East Texas remained negative.
Based in Tyler, 11-hospital East Texas has been posting operating losses and running a margin of negative 6.9% in its 2017 fiscal first quarter, which ended Jan. 31.
At the current rate of operating losses, the system could violate debt service covenant by fiscal year-end unless it sells assets, Moody's said.
That could cause a default on payments, allowing bondholders to accelerate payments, Moody's said.
"We recognize the assessment of Moody's, and ETMC is working on a plan of action to avoid default," East Texas spokeswoman Rebecca Berkley said.
Moreover, East Texas is facing volume pressures from its cross-town rival, Trinity Mother Frances Health System, which was acquired in May by much bigger Christus Health, Moody's noted.
Christus, with more than 50 hospitals and long-term care facilities, has the capital to expand services in the market, Moody's said.
Though it has divested some rural hospitals in recent years, East Texas still owns rural hospitals that are suffering from declining populations and economic troubles in the oil patch.