Moody's Investors Service Monday downgraded Lowell General Hospital in Massachusetts to Baa1 from A3 as the health care provider plans to increase its debt load dramatically to help finance a new patient tower. The outlook is stable.
Meanwhile, Standard & Poor's Monday affirmed its equivalent BBB-plus rating for the credit and revised its outlook to stable from negative in light of rising earnings and growing volume and market position.
Fitch Ratings rates Lowell General BBB-plus with a negative outlook.
The Massachusetts Health and Educational Facilities Authority will sell about $115 million of fixed-rate and variable-rate bonds in mid- to late September on behalf of Lowell General.
The hospital's outstanding debt will increase to $115 million from $14.3 million, according to Moody's. The borrowing will place a strain on Lowell General's balance sheet in the near term, yet hospital officials expect the new six-story patient building will grab 5% of market share from 2012 through 2022, Moody's said.
"While in the long term we believe that construction of the new patient tower will ultimately lead to market share capture, strong volume growth, and improved operating performance, the increase in debt will significantly weaken [Lowell General's] balance sheet and is the primary driver behind the rating downgrade," according to a Moody's report.
The provider's cash-to-debt ratio, which compares unrestricted cash reserves to outstanding debt, will drop to 51% from 165.4%, as a result of the upcoming borrowing, Moody's said.
Standard & Poor's acknowledged Lowell General's tight balance sheet as the hospital prepares to take on more debt, but the new facility will enable the provider to gain more market share and increase its revenue over the long term.
"The stable outlook reflects our view of [Lowell General's] recently positive volume and earnings momentum," Standard & Poor's credit analyst Cynthia Keller Macdonald said in a statement. "Although we consider the balance sheet weak for a BBB-plus credit, we believe the project will improve LGH's ability to attract patients by providing a more modern physical facility, which, in turn, should translate into higher revenue and earnings."
The hospital's admissions in fiscal 2009 grew 8.6% over the previous year's admissions, according to Moody's. During the last four years, average yearly revenues have grown by 9% to 10%. Lowell General's market share has increased by 6% since 2003.
Lowell General is the leading health care provider in its primary service area, accounting for 39% of market share in fiscal 2008. The 217-bed facility is located in Lowell, 30 miles northwest of Boston.
"LGH has been successful in capturing market share from its local competitor and reducing outmigration to tertiary facilities in Boston," according to Moody's.
Cain Brothers & Co. is the underwriter. The transaction will include $61 million of Series 2010C fixed-rate bonds set to price Sept. 15, said MassHEFA spokesman Liam Sullivan. Another $54 million of Series 2010D variable-rate bonds will price on Sept. 28. JPMorgan will provide a letter of credit on the variable-rate bonds for a term of five years.
The hospital will hedge a portion of the variable-rate debt with a swap agreement with Deutsche Bank AG as counterparty. The notional amount of the derivative is $39 million, according to Moody's. In the agreement, which takes effect Nov. 1, Lowell General will pay Deutsche Bank a fixed rate of 3.22% and receive from the bank 68% of the one-month London Interbank Offered Rate.
The hospital is not required to post collateral on the swap and can terminate the derivative beginning Aug. 1, 2015, if it chooses to. Lowell's termination payment is limited to 1% of the swap's notional amount.
Along with financing the new patient tower, the deal will refinance the hospital's outstanding Series 1996 bonds.
