Declining revenues and a potential default event prompted Fitch Ratings late Tuesday to downgrade Saint Barnabas Health Care System to BB-plus from BBB, affecting roughly $900 million of debt. Fitch also revised the outlook to negative.
The New Jersey Health Care Facilities Financing Authority has served as a conduit issuer for most of the health care provider's debt. The New Jersey Economic Development Authority has also sold bonds previously for the system. Saint Barnabas is the largest health care system in New Jersey, with 2,300 acute-care beds, according to Fitch. It is the second-largest employer in New Jersey.
Saint Barnabas had 87 days of cash on hand as of Sept. 30. Under bond agreements, the system must have at least 60 days cash on hand or it will be in default. Operating losses through the year have decreased Saint Barnabas' days cash on hand and Fitch analyst Carolyn Tain said additional losses in October could affect the system's liquidity as well.
"In this particular case we're talking specifically about liquidity covenant violation," Tain said. "They have a covenant that says they have to maintain a certain number of days cash on hand and there's a strong possibility that they may violate that .... We don't have any more information about October, but we have been told that there have been further liquidity declines in October."
On Nov. 19, Moody's Investors Service affirmed Saint Barnabas' roughly $850 million of debt sold through the NJHCFFA at Baa2 and revised the outlook to negative. On Oct. 9, Standard & Poor's downgraded the credit to BBB-minus from BBB with a stable outlook. A large portion of the debt is insured through MBIA Insurance Corp. and Financial Security Assurance Inc.
The system's Series 2006A bonds maturing in 2029 last traded on Nov. 24 and sold at 63.287 with a 8.927% yield. Those bonds first priced on Dec. 7, 2006, for 104.41 with a 4.45% yield.
Since 2006, Saint Barnabas has experienced annual operating losses, including a $33.2 million current year-to-date loss through Sept. 30. Positive non-operating income in prior years helped cushion those decreases in operating revenue. Conversely, non-operating revenue has dropped by $14.6 million from Jan. 1 through September, creating a negative excess income of $47.8 million for the year so far.
In addition, in 2006, the health care provider agreed to pay $265 million in a settlement with the federal government for overpayments in Medicare, of which Saint Barnabas has paid $143 million, according to Moody's.
The system has two flagship facilities in northeastern New Jersey, Saint Barnabas Medical Center in Livingston and Newark Beth Israel Medical Center. Beth Israel has taken on patients from two hospitals that are now closed, Saint James Medical Center and Columbus Hospital. The increased business has also boosted Beth Israel's Medicaid patients by 1.8% as of July 31, compared to the same period last year.
"Since Medicaid pays less than cost, the new volumes have not helped financially," according to Standard & Poor's. "The system is working at the state level to try to capture more charity-care pool reimbursement, but that will be difficult given that the state's budget for fiscal 2009 cuts the size of the statewide charity-care pool by 15%. The cut hurts [the system] by $11 million annually, beginning July 1, 2008."
The credit does have strengths. It has a $2.2 billion revenue base and six acute-care hospitals within its umbrella. More than 4,700 physicians, 25% of New Jersey's physician population, are affiliated with the Saint Barnabas system, according to Fitch. Saint Barnabas Medical Center and Beth Israel are teaching affiliates of the University of Medicine and Dentistry of New Jersey.
Saint Barnabas Health Care System and the NJHCFFA did not return calls for comment.
