Another rural Texas hospital is on the brink of bankruptcy

DALLAS – Nacogdoches County Hospital District took a nine-notch downgrade from S&P Global Ratings as the East Texas hospital operator prepares to file for bankruptcy.

The downgrade to B-minus from A-minus on Monday comes with a negative outlook affecting $58.7 million of bonds issued for Nacogdoches Memorial Hospital.

The Nacogdoches Memorial Hospital has hired a law firm to manage bankruptcy reorganization.

"The downgrade reflects our view of Nacogdoches County Hospital District's exceptionally weak operations, which have resulted in its delayed vendor lease payments and vulnerable liquidity position that contribute to concerns regarding its operating viability and therefore potential for bankruptcy filing," said S&P Global Ratings credit analyst Jennifer Garza.

On June 7, the hospital district board voted to hire the Dykema law firm to handle the reorganization process. In addition to the bond debt, the hospital owes vendors more than $10 million, officials said.

Hospital chief executive Gary Kendrick said the plan is not to walk away from Memorial's debt but to restructure. That would delay payments to vendors. The district has not defaulted on its bond payments.

S&P said that holders of the district’s sales tax revenue bonds still face risk.

“Should the district file for Chapter 9 bankruptcy, we believe that despite the legal protections afforded to the sales tax revenue bonds, given the significant powers reserved to debtors in municipal bankruptcy and the lack of precedent, uncertainty remains regarding its willingness to continue to pay bondholders as agreed,” Garza said. “We also believe uncertainty exists as to whether the pledged revenues may be subject to a stay.”

In explaining to the public how the hospital landed on the brink of bankruptcy, district officials cited reimbursement cuts from government payers like Medicare and Medicaid, Texas’ decision not to expand Medicaid for the working poor, a significant shift from inpatient to outpatient care, and competition from other providers.

“Times are difficult, especially for rural hospitals like Nacogdoches Memorial Health,” the district said. “We acknowledge that financial issues and a large amount of debt -- debt accrued over years -- are attached to the hospital. We also need to acknowledge that a strategic resolution can only occur with unity – board, leadership and staff working together.”

Several other rural hospital districts in Texas have seen downgrades or bankruptcy after the state refused to expand Medicaid coverage.

The district competes with a for-profit hospital, Nacogdoches Medical Center, for commercially insured and managed care patients.

“While providing essential services to the region, the area's lower-income population and the district's reliance on third-party subsidies make it vulnerable to potential cuts in governmental funding,” wrote Fitch Ratings, which lowered the credit to CC from B in September 2017.

The district last issued $7.3 million of sales tax-backed refunding bonds in 2016.

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