Standard & Poor's Ratings Services said it lowered its long-term rating on Lebanon County, Pa.'s series 2004 and 2002 revenue bonds, issued for Good Samaritan Hospital of Lebanon, Pa., to B-plus from BB-plus.
The outlook is stable.
"We based the downgrade on what we view as persistent high operating losses, leading to thin coverage of maximum annual debt service," said Standard & Poor's credit analyst Liz Sweeney. "We believe the operating losses will soon begin to erode GSH's unrestricted reserves, which to date have been stable because of rising investment markets and limited capital spending," Sweeney added.
After operating income briefly improved in 2011, it reverted to a loss in fiscal 2012, the eighth operating loss in the past 10 years. This negative operating trend continued in the first six months of fiscal 2013.
Credit risks include: a sizable operating loss in fiscal 2012; thin debt service coverage; a relatively small primary service area, with adequate demographics, but measurable outmigration to nearby Hershey and Harrisburg, Pa.; and ongoing challenges related to physician recruitment and retention, which have affected patient volumes and market share in 2012.
Credit factors that support the rating include GSH's: strong market share of 58% within the primary service area of Lebanon County, although patients continue to outmigrate for tertiary services and market share declined by 3% in 2012; and relatively stable balance sheet featuring adequate days' cash, rising unrestricted reserves to long-term debt, and a conservative debt structure, offset by a rising age of plant, growing leverage, and an underfunded pension plan.
The stable outlook reflects that GSH has the balance-sheet strength to withstand operating losses at the current level for the next year or two. In the long term, however, rating stability will hinge on GSH's ability to restore operating income to profitability to generate stronger debt service coverage, preserve unrestricted reserves, and provide adequate cash flow for future capital investment plans, which are modest but could ultimately emerge at higher levels.
