DALLAS – Texas' El Paso County Hospital District received a two-notch Standard & Poor's downgrade in the wake of the district's legal settlement with an affiliated children's hospital that's in bankruptcy.
Standard & Poor's dropped the hospital district's rating to A-minus from A-plus. The district, which issued $120 million of bonds for the El Paso Children's Hospital in 2008, has about $233 million in general obligation debt outstanding
Standard & Poor's restored its outlook to stable.
"We base the downgrade on our view of the district's declining cash levels
related to operational pressures tied to the operation of El Paso Children's
Hospital, which recently declared bankruptcy," said Standard & Poor's credit analyst Brian Marshall.
Ryan Mielke, spokesman for the hospital district, said the downgrade is not expected to have any impact on operations.
"We had a stellar quarter and a stellar year," he said. "We don't anticipate issuing any debt in the near future, and we look at that [the downgrade] as temporary. It was related to Children's Hospital, and we see that situation rectifying itself very soon."
The Children's Hospital is located entirely within the University Medical Center but operates as a separate 510(c)(3) nonprofit entity.
The El Paso County Hospital District, which is supervised by its own board and overseen by the El Paso County Commission, issued debt for both Children's and UMC.
On Oct. 14, nearly five months after Children's declared bankruptcy, UMC and Children's announced a settlement that allows Children's to maintain a separate board and operations.
Children's declared Chapter 11 bankruptcy May 19, a day after UMC made a final offer on resolution of Children's $49.3 million debt to UMC.
Mielke said the district hopes to have approval of the settlement from U.S. Bankruptcy Court Judge Christopher Mott by the end of December. UMC has deposited $7 million in the Children's account as part of the agreement.
Through the Texas Attorney General, the state Health and Human Services Commission has objected to part of the settlement agreement.
HHSC opposed a part of the plan that prevented the state agency from collecting fines and fees for Children's incorrect reporting of costs. In 2014 Children's reported that it paid $27 million of rent to UMC when it actually did not. Children's was reimbursed money from the government for reporting that. In its objection, HHSC said it still needs the option to fine Children's for possibly receiving money to which it wasn't entitled.
County officials said Children's could be fined up to $66 million for the reporting error. County officials and State Sen. Jose Rodriguez have worked with HHSC, urging the agency to reduce the fine.
One El Paso lawyer has also questioned the legality of the bankruptcy settlement.
The attorney, Andy Krafsur, issued a statement that making Children's a subsidiary of UMC and allowing UMC to subsidize Children's is illegal. Under the Texas constitution, no county or city or any other public entity can lend or grant money to a corporation or become a stockholder.
"There have been no controls whatsoever on EPCH to protect the taxpayers' investment," Krafsur said. "We have risked over $100 million to date, with more to come, and no hope of being repaid absent more litigation against those who might be responsible for these lapses in judgment."
El Paso County Judge Veronica Escobar dismissed Krafsur's complaint, and said the agreement has been vetted by attorneys from both sides.
Under the settlement, the $106 million that Children's technically owes UMC for back rent and services would be reduced to $48 million. That debt would be put in line behind the $10 million that Children's owes to Texas Tech University Health Sciences Center and another $7 million that's owed to drug companies and other vendors.
Despite disagreement over the settlement, Marshall said that S&P does not expect to change the rating in the short term.
"The stable outlook reflects our expectation that the rating will not change
over the two-year outlook horizon," he wrote in the Nov. 23 report. "We expect it [UMC] to post adequate operational results despite operational challenges tied to EPCH's bankruptcy filing and planned emergence. We also do not expect major changes in the tax base, market value, or unemployment figures that would change the underlying strength of the economy."
Fitch Ratings affirmed its AA-minus rating on the district June 26 and removed the credit from its negative watch list.
"Removal of the Rating Watch Negative reflects Fitch's expectation for stable operations despite the El Paso Children's Hospital (EPCH) bankruptcy petition and complaints filed against the district," analysts said. "Fitch believes the district maintains the ability to manage potential resultant losses consistent with the current rating."
S&P downgraded the district to A-plus from AA-minus on Dec. 12, 2014 and put the rating on its negative watch list May 21.
