CHICAGO — Standard & Poor’s revised its outlook to negative from stable on a small Michigan hospital that is facing the possibility of accelerated debt-service payments on its debt, all of which has been either privately placed with a bank or is in the form a bank loan.
Oaklawn Hospital, a 94-bed facility located in the town of Marshall near Kalamazoo, is already rated BBB-minus by Standard & Poor’s, the lowest investment-grade level.
The negative outlook revision reflects risks surrounding the hospital’s debt, which totals $78.5 million, or 53% of its unrestricted cash.
Nearly all of the debt is tied to banks, either through a private placement or a loan. After a $38 million borrowing last year, Oaklawn now faces the threat of accelerated payments amid decreased liquidity and reduced debt-service coverage ratios.
“From a credit perspective, they’re doing fine — they’ve been very consistent and there’s no negative trend,” said Suzie Desai, an analyst with Standard & Poor’s. “But they have a lot of debt and they’ve gotten into these agreements and there’s some risk there.”
Other health care facilities, especially small operations like Oaklawn that are lower rated and usually borrow under $50 million, are eying private placements as a way to avoid paying high yields on the public market.
But like letters of credit or standby bond purchase agreements, private placements carry their own risks, such as accelerated payments or renewal risk. In Oaklawn’s case, it faces some kind of forced refinancings in 2015, 2016 and 2021, according to analysts.
“We’ve seen more and more of these,” Desai said of private placements and other types of alternative financings to the tax-exempt municipal market. “With more traditional fixed-rate structures, there’s less concern because there are not as many opportunities for acceleration of debt.”
The hospital has not yet violated any of its covenants. But the threat is there, particularly with a covenant requiring 75 days’ cash on hand and another, from its master indenture, requiring one-times debt service coverage.
If a violation occurs, the banks could demand that the hospital make accelerated payments on the bonds, which would pose “a serious problem for Oaklawn’s overall financial profile,” Desai said in the outlook revision report.
The hospital also has three floating-to-fixed-rate swaps, two of which are part of the 2010 borrowing. The hospital terminated a two-year-old swap with Lehman Brothers in December 2008, two months after the investment bank declared bankruptcy. Oaklawn has calculated its loss at $6.1 million, but is still waiting to find out the exact amount as Lehman’s bankruptcy proceedings continue, according to Standard & Poor’s.
