NEW YORK - Standard & Poor's Ratings Services said it lowered its long-term rating on the Illinois Finance Authority's series 2007A fixed-rate bonds, issued for Sherman Health, to BBB from A-minus. At the same time, Standard & Poor's lowered its underlying rating (SPUR) on the authority's series 1998 revenue bonds to BBB from A-minus.
The downgrade reflects Sherman Health's greater-than-expected operating losses in fiscal 2008 and through interim fiscal 2009 (following uneven operating performance in earlier years) with negative operating margins of 6.0% and 5.1%, respectively. This resulted in weak maximum annual debt service coverage through interim 2009 of 1.0x. Operations were expected to be modest, but positive, according to original forecasts in the years leading up to the opening of Sherman's new hospital. In addition, management reports softness in volumes and declines in unrestricted liquidity related mostly to challenges in the U.S. and international equity markets.
The BBB rating is supported by continued solid, though much reduced, unrestricted liquidity of 238 days' cash on hand, but a more modest level cash–to-long-term debt of 56%, given the decline in investments with continued declines in unrestricted liquidity expected as Sherman Health makes an equity contribution towards a hospital project. Construction of a replacement hospital, located about five miles from Sherman's current location, that is running on time and on budget and a leading business position in a service area that is experiencing favorable population growth and demographic trends are added credit strengths.
Other credit concerns include high leverage of 55% and a high debt burden of 8.5% with the series 2007 debt issuance and increased expenses associated with a replacement hospital.
"The stable outlook reflects Sherman Health's good levels of unrestricted liquidity and good market position," said Standard & Poor's credit analyst Brian Williamson. "We expect declines in unrestricted liquidity as Sherman Health makes its final contributions towards the replacement project, but believe the balance sheet will stabilize over the next year," said Williamson.
We would base any upward movement on the rating on improved financial performance and debt service coverage, which is likely to occur after the completion of the new hospital next winter.
Sherman Hospital and Sherman West Court, a nursing home, are jointly and severally obligated for the debt, along with their parent, Sherman Health System. Standard & Poor's analysis reflects the whole system. The system is located in Elgin, Ill., a suburb 40 miles northwest of Chicago.
