California hospital district, hit by coronavirus, downgraded to junk

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A hospital district serving a county that is one of California's hardest-hit by COVID-19 was downgraded to junk.

Fitch Ratings downgraded Pioneers Memorial Healthcare District’s general obligation bonds, revenue bonds and issuer default ratings to BB from BBB-minus, and maintained its rating watch negative.

The district, already struggling before the coronavirus pandemic, faces operating challenges that limit its overall financial flexibility, Fitch analysts wrote.

The rating action affects $22 million in debt outstanding in three series of GO and revenue bonds, said Melanie Her, a Fitch analyst.

“Like many hospitals and healthcare providers, the COVID-19 pandemic has had a significant impact on Pioneers Memorial Healthcare District in many ways,” Carly Loper, the healthcare district’s interim chief financial officer, wrote in a disclosure letter to revenue bondholders posted June 1 on the Municipal Securities Rulemaking Board’s EMMA website. “Since mid-March 2020 when PHMD treated its first COVID-19 patient, operations and finances have been adversely impacted.”

Its 107-bed Pioneers Memorial Hospital in Brawley admitted 66 patients with COVID-19 between March 19 and June 1, and was expecting an additional surge after the July 4th holiday, Loper wrote.

According to California's COVID-19 dashboard, as of Tuesday morning 107 hospital beds in one Imperial County hospital had 82 hospitalized COVID-19 patients, of whom 27 were in the intensive care unit. The 107 beds reported by the state corresponds with the bed count at Pioneers, though the county also has a 161-bed hospital in El Centro.

Operating expenses increased due to the pandemic and the hospital struggled with shortages of personal protective equipment, Loper wrote. The hospital has increased its telehealth services, but does not receive reimbursements at the same rate as in-person visits, she wrote.

The hospital posted a $4.7 million deficit from July 1, 2019 to April 30, 2020 compared to a deficit of $115,634 for the same period a year earlier, Loper wrote.

The series 2017 revenue bonds are secured by a gross revenue pledge and further secured by a debt service reserve fund.

The series 2012 and 2004 ULTGO bonds are payable from an unlimited ad valorem tax pledge on all taxable properties within the district boundaries, without limitation as to rate of amount.

Fitch is the only rating agency that rates the hospital’s debt, since S&P Global Ratings withdrew its rating in 2017.

PMHD maintains a leading market position in its patient service area in northern Imperial County, which borders Mexico and Arizona. The county, which has a population of 182,000, has an economy based on energy and agriculture and an above average unemployment rate of 18.3%, Fitch wrote.

Factors that led to the downgrade are the district’s weakened balance sheet and liquidity decline prior to the pandemic, long-term economic uncertainty, CFO turnover and insufficient cash flow to address growing capital needs, according to Fitch.

In the first nine months of fiscal 2020 ended March 31, 2020, the district posted operating losses of $4 million prior to the impact from the pandemic. This was driven by low overall volumes coupled with continued salary and wage pressures. Fitch expects operations will be pressured into the first quarter of fiscal 2021 given the current conditions of the virus in Brawley.

The district’s challenges have been offset by $10 million in stimulus funding received from the CARES Act, which Fitch analysts said they expect will enable the district to meet its debt service coverage covenant for fiscal year 2020.

Along with operating expense pressures, Fitch wrote, the district continues to experience unexpected declines in volumes in both inpatient and outpatient settings leading to operating results that have been unfavorable to budget expectations over the past couple of years. With the district experiencing high volumes of virus-related cases and potentially long-term strain on hospital resources, Fitch views PMHD as having limited operational and financial flexibility over the near term.

Fitch expects that PMHD will be able to meet its bond covenant requirements as of fiscal year-end June 30, 2020 as stimulus funding helped boost the district's days cash on hand metric and debt service coverage. The district reported 73 days cash on hand and an annualized debt service coverage of 2 times as of May 31, 2020 relative to its covenant requirements of 50 days cash on hand and 1.2x debt service coverage.

Management indicated to Fitch that additional stimulus funding received in June and July is expected to further bolster the district's cash levels. Beyond fiscal 2020 and without further support from state and federal resources, Fitch views maintenance of the district's key metrics as a credit concern given the uncertainties of the pandemic and its future impact on the district. The downgrade and rating watch reflects the district's limited financial resources and increased vulnerability during a time of operational and economic stress.

The coronavirus outbreak and related government containment measures worldwide has created an uncertain and currently negative environment for the entire healthcare sector, according to Fitch.

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