Moody's Investors Service has downgraded to A2 from A1 the rating assigned to Baptist Healthcare System Obligated Group's $614 million of outstanding rated debt issued by the Kentucky Economic Development Authority.

The outlook is stable at the lower rating level.

The rating downgrade is attributable to a marked decline in operating cash flow generation for the system in FY 2013. The stable outlook reflects balance sheet strength that provides flexibility during a time of budgeted operational improvement.

The rating downgrade reflects continued weakening of operating cash flow generation to very low levels in interim FY 2013 performance partly driven by continued growth in losses in the physician employment strategy along with operating losses from recently acquired facilities.

The operating losses are weaker than we anticipated and are likely to continue through the remainder of the fiscal year. Volumes are under pressure, with same store declines in several areas.

The stable outlook is attributable to a good balance sheet with increasing liquidity, and our expectation of no erosion in liquidity, that provides flexibility during the operational turnaround. Debt levels are also manageable.

Management is developing multiple strategic initiatives to improve operating performance in FY 2014, including revenue improvement through renegotiated contracts and cost reductions in the areas of labor and supplies controls, but has yet to fully execute the plan. Baptist Healthcare System (Baptist) also benefits from operating cash flow diversification across several markets in the state but is still vulnerable to statewide trends, including declining admissions.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.