LOS ANGELES — Moody's Investors Service downgraded a Lancaster, Calif.-based hospital district to junk Wednesday, maintaining a negative outlook.
Analysts cited weak operating performance and greater reliance on supplemental funding in downgrading Antelope Valley Hospital District's revenue bonds to Ba2 from Baa3 impacting $108 million in debt. The debt is fixed-rate, although there is a $55 million bullet in 2017, according to a Moody's report.
"The rating downgrade is based on AVHD's growing reliance on supplemental government funding to meet its debt service coverage covenant, which is a result of weak core operating performance and patient volume declines," according to the ratings report.
The district, which operates a 420-bed hospital located in northern Los Angeles County in a suburban region of the Mojave Desert, would have negative cash flow absent supplemental funding. It may not meet its debt service coverage covenant in fiscal 2014, according to the report.
The hospital district narrowly maintained an investment grade rating last June following the unexpected departures of its chief executive officer and chief financial officer. Both left to pursue professional opportunities.
It has since named a permanent CEO and CFO. Dennis Knox, former CEO of Western Medical Center in Anaheim, was named chief executive officer in November 2013. Paul Brydon, who was named interim chief financial officer in July 2013, has since been named permanent CFO.
Moody's had affirmed the Baa3 rating in a July 2013 report on an expectation that AVHD's financial performance would not decline from current levels and the strategies outlined by management would improve the district's financial performance over the year. Analysts now say that they do not expect the hospital district to realize performance improvement until fiscal 2015.
"Under a new management team, AVHD has begun taking steps to improve financial performance," analysts said. "However, we believe the hospital will not benefit from these actions until 2015, and there is significant execution and operational risk in the interim before core operations return to a level of profitability consistent with an investment grade rating."
During the first six months of fiscal year 2014, Moody's said, in-patient admissions dropped 6.6% and surgeries dropped 3.1% over the prior year.
Since fiscal 2013, analysts said unrestricted cash has declined by 12% to $97 million, which is 109 days cash-on-hand and it may decline further by fiscal 2014 year-end as a result of weak operating cash flow, planned capital expenditures and the timing of supplemental payment receipts.
Moody's said the lowered rating reflects AVHD's "high reliance on supplemental funding as a source of liquidity and very thin headroom under its debt service coverage covenant of 1.35 times and 90 days cash on hand covenant."
The negative outlook reflects increased risk of breaching financial covenants and fundamental operating challenges.
