—CHICAGO  Moody's Investors Service on Friday placed Illinois-based Proctor Hospital's speculative-grade B2 rating on review for upgrade due to its signing of an affiliation agreement with the stronger and larger Methodist Health Services Corp.

The action impacts $22.5 million of rated debt sold through the Illinois Finance Authority in 2006. Moody's previously had the rating on review for a downgrade due to a sharp decline in its cash and investments and ongoing operating losses.

The reversal follows the signing earlier this month of an affiliation agreement between Proctor Health Care Inc., Proctor Health Care Foundation, and Methodist Health Services Corporation.

Proctor Hospital is owned by PHCI while MHSC does business as UnityPoint Health. The system owns Methodist Medical Center which carries a stronger A2 rating with a positive outlook. UnityPoint Health was formerly known as Iowa Health System.

Under the agreement, MHSC would take ownership of Proctor. The acquisition still faces regulatory approval. Proctor had previously been close to an affiliation deal with OSF Healthcare System but it was terminated in July.

"The UnityPoint Health transaction is projected to close by calendar year end. Management reports under terms of deal, Proctor's debt would likely be brought into parity with UnityPoint Health's existing debt by calendar year end 2013," Moody's said.

Standard & Poor's last month pushed Proctor's rating down to BB-minus from BB-plus and warned of the potential for further deterioration by assigning a negative outlook due to its poor cash position.

The hospital serves the competitive Peoria area. The hospital serves a small area and has a high reliance on its top 10 admitting physicians. The hospital also has violated covenants for its privately placed debt although it has received waivers. Regions Bank holds the bonds sold in 2010.

"The negative outlook reflects our view of the hospital's balance sheet deterioration and operating losses… and volume softness in fiscal 2013 to date," Standard & Poor's said.

Moody's last lowered the rating three levels to B2 in June. The hospital generates $115 million in annual revenues.

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