LOS ANGELES — The Fremont-Rideout Health Group received a three-notch Standard & Poor's downgrade to BBB from A on three series of revenue bonds, citing a sharp deterioration in financial performance.
The downgrade of the Northern California hospital group affected Series 2003A and Series 2011 revenue bonds issued through Marysville, Calif. and Series 2006A revenue bonds issued through the California Statewide Communities Development Authority. The hospital group had $147.3 million in outstanding debt as of June 30, 2014, according to its most recent comprehensive annual financial report.
S&P also revised the outlook to negative from stable.
"The rating action reflects the sharp deterioration in FRHG's financial profile, driven in large part by increased costs required to resolve regulatory compliance issues faced by the organization," said Standard & Poor's credit analyst Kenneth Gacka.
The hospital group has a leading market share in its primary market area, but its payor mix has a high concentration of Medicare and Medicaid patients, Gacka said.
Turnover in management and regulatory compliance issues have impacted strategic execution and the completion of its tower replacement project, he said.
The hospital group announced on Sept. 3 that Gino Patrizio, the hospital's chief operating officer, will begin transitioning into the role of chief executive officer. He was named assistant CEO that day and will transition into the top spot this fall under the guidance of current interim CEO Robert Chason.
S&P assessed the hospital's profile as adequate even though the hospital sustained substantial operating losses and had a very weak maximum annual debt service coverage in fiscal 2015, according to the Sept. 23 S&P report. Increased consultant costs to comply with the system's improvement agreement established by the Centers for Medicare & Medicaid Services contributed to the losses, according to S&P.
"We understand that FRHG is now in compliance with CMS regulations; however, we expect that the ongoing costs will continue to weigh on the bottom line," Gacka said.
Those costs combined with capital spending on the replacement hospital funded by cash will likely weaken the balance sheet over the coming year, further stressing the balance sheet, he said.
