DALLAS Standard & Poor’s revised its outlook to positive from stable on BB-minus rated Good Shepherd Medical Center in East Texas, which is restructuring $88 million of debt.
“The positive outlook and affirmed BB-minus ratings reflect our view of Good Shepherd's stabilizing operating situation, and the $69 million sale and leaseback of nine medical office buildings completed in December 2014,” S&P analyst Karl Propst wrote. “Monetization of the office buildings improved Good Shepherd's cash position and provides funding for growth.”
Good Shepherd is placing its 2015 bonds with JP Morgan. The bonds have a two-year put. Proceeds will refinance $80 million of series 2012A and 2012B direct purchase bonds held by JP Morgan Chase Bank and Wells Fargo, and will also fund an $8.8 million debt service reserve. The 2012A, 2012B, and 2004 bonds will be defeased. The 2004 bonds will be defeased using Good Shepherd's unrestricted reserves, according to S&P.
Moody’s Investors Service maintained its negative outlook on the system’s Ba3 rating, which “incorporates significant challenges related to reversing large operating losses and improving very weak operating cashflow in the face of a competitor that is gaining volumes and market share,” Moody’s analyst Lisa Martin wrote.
Good Shepherd president Steve Altmiller and chief financial officer Timothy Pileggi held an investor call Feb. 11 to outline the restructuring.
First Southwest Co. senior vice president Chris Jannings and managing director Laura Alexander worked with Good Shepherd on the restructuring, Pileggi said.
“We have not missed any covenant except for the rating agencies’ downgrade, which we can’t control,” Pileggi told The Bond Buyer.
S&P joined Moody’s in downgrading Good Shepherd two notches below investment grade on Nov. 3 after the healthcare system failed to complete an asset sale by an Oct. 15 deadline set by lenders.
Good Shepherd had entered into a forbearance agreement with Wells Fargo Municipal Capital Strategies and JPMorgan Chase Bank that had to be extended.
Good Shepherd Health System then sold nine medical offices and other buildings in January in a $68.5 million deal that included two buildings in its headquarters town of Longview.
“It has been common business practice within healthcare entities to divest themselves of medical office buildings that are not core to healthcare operations,’” Altmiller said in a prepared statement. “Property management, leasing, facility maintenance and improvements are better managed by real estate operators rather than health care operators.”
The system's primary competitor is Longview Regional Hospital, owned by for-profit CHS. While CHS's hospital is much smaller, facility expansion and physician recruitment has resulted in volume gain, according to S&P.
Longview Regional is opening a medical office building in the spring of 2015, which could result in further volume losses for Good Shepherd, analysts said. GSHS's admissions declined by 14% in fiscal year 2014.
The decline was due to the closure of a third campus, the shift to observation cases and losses to the competitor, analysts said.
