Standard & Poor's Ratings Services said it revised its outlook to negative and affirmed its A-minus long-term rating on the Connecticut Health & Educational Facilities Authority's series 2010 and 2012 revenue bonds issued for Stamford Hospital.
"The negative outlook reflects our view of Stamford's weakened operations," said Standard & Poor's credit analyst Jessica Goldman, "and, more specifically, its inability to overcome the cost of the state's hospital tax, resulting in weak maximum annual debt service coverage (MADS) that is not in line with rating."
This is combined with the expected balance-sheet weakening that could be deeper than thought, given cash flows are depressed and fundraising collections are slow to bolster the reserves. The organization maintains a solid business position with a strong market share and interim volumes that are stable compared with the flat-to-declining regional and national trends.
Management has embarked on a substantial fundraising campaign to support its current campus modernization project, which is also supported by the 2012 debt and planned equity contributions in future years. There is some uncertainty as to the speed of collection for these funds and how quickly Stamford's balance sheet will recover.
"Because management plans to use future cash flows and reserves to fund a significant portion of the project and may need to fund more should philanthropic funds fall short of expectations," said Goldman, "we consider this uncertainty a credit risk."
Following management's projections, some diminution in reserves is expected over the next one to two years to support the current project, though as fundraising proceeds are collected and debt is repaid that balance-sheet metrics will begin to improve.
Operating profitability should improve sufficiently over time to generate stronger debt service coverage (DSC) and to offset the weaker balance-sheet metrics.
"The negative outlook reflects our view of Stamford's inability to overcome the cost of the hospital tax and DSC that is not in line with rating," added Goldman.
While management's operating performance could improve over time, given the organization's strategic growth initiatives, the hospital tax has created a hurdle for the organization that is set to absorb a new tower in fiscal 2016. Some decline in reserves in 2015 is expected as the equity portion of the project is funded, the magnitude of this decline will depend on Stamford's ability to generate favorable cash flow, as it has historically, and to collect on its capital campaign.
The rating could be lowered if operating margins do not improve to be more in line with the rating, or if cash flow and fundraising receipts are weaker than expected, resulting in unrestricted reserves below 70% of long-term debt. A higher rating is not likely in the near term given the organization's significant debt load and overall financial profile that is currently strained for the current rating.
