Standard & Poor’s yesterday dropped New Jersey’s largest health care provider, Saint Barnabas Health Care System to BB-plus from BBB-minus, affecting more than $800 million of outstanding debt. The outlook is negative.
Standard & Poor’s also affirmed its AA-plus rating on Saint Barnabas’ $34.4 million Series 2001A variable-rate bonds that carry a letter of credit from JPMorgan Chase Bank NA. That double-A rating is based on a joint criteria of both the health care provider and the bank’s credit ratings.
Fitch Ratings in December downgraded Saint Barnabas to BB-plus from BBB, including the Series 2001A bonds. The outlook is negative. Moody’s Investors Service rates the credit Baa2 with a negative outlook.
The New Jersey Health Care Facilities Financing Authority has served as a conduit issuer on most of the health care provider’s debt. The New Jersey Economic Development Authority sold bonds on behalf of Saint Barnabas in 1996 and 1997. Most of the credit’s debt is insured by MBIA Insurance Corp. and Financial Security Assurance Inc.
The health care entity has a waiver and forbearance agreement that will extend through Feb. 1, 2010, relating to a nonpayment-related technical default on its outstanding bonds, according to Standard & Poor’s analyst Cynthia Keller Macdonald. Under bond agreements, Saint Barnabas must have at least 60 days cash on hand and maintain debt service coverage of one times, according to Moody’s. It fell into technical default at the beginning of 2009.
“The Saint Barnabas Corporation Obligated Group/Combined Group was not in compliance as of Aug. 31, 2009, with certain nonpayment covenants related to liquidity and debt service coverage,” according to the credit’s financial documents dated Aug. 31. “The Corporation Obligated Group/Combined Group have engaged an independent consulting firm and continue to work with the consulting firm to address the issues related to noncompliance with its covenants, and have been in discussions with bondholders, bond insurers, and lenders concerning noncompliance with the covenants, with the goal of amending, modifying, or obtaining a waiver of compliance with such covenants.”
If Saint Barnabas is not in compliance by February or if the waiver is not extended, the system will be at risk of non-renewal of the letter of credit for the joint-criteria series 2001A bonds and for potential repayment of the outstanding line of credit, according to Standard & Poor’s.
While Standard & Poor’s sites the entity’s new acting chief financial officer, Tom Scottas a strength, it believes the system’s weak liquidity and balance sheet reflect a rating below investment grade. The system reported an operating loss of $74.1 million in 2008 and had 56 days cash on hand as of July 31.
“The combination of the operating losses, investment losses, and significant pension write-downs has resulted in negative equity and a high debt-to-captial ratio of 140%,” Standard & Poor’s said.
Staff and expense reductions and improved reimbursements have helped Saint Barnabas obtain net revenues of $15.6 million for the first seven months of 2009. It has more than 3,000 acute-care beds at six hospitals in New Jersey, making it the largest health care system in the state and accounting for 12.7% of market share in 2008. Saint Barnabas does not hold any derivatives.
“We had certain expectations and they weren’t met,” Keller Macdonald said. “And that coupled with the balance sheet weakness, we just felt that it was more representative of [non-investment grade]. Obviously they’ve improved a lot in the interim, based on the six months numbers, and institutionally they’re a very strong provider so hopefully they’ll be able to work their way.”
Saint Barnabas did not respond to requests for comment. The health care facilities authority had no comment by press time.