Moody’s Investors Service revised its outlook to negative from stable on Cardinal Health System’s Baa2 rating as the central Indiana provider struggles with growing competition, a weak economy, and an $8.8 million operating deficit in fiscal 2007.

The system carries $143 million of outstanding debt. Moody’s revision affects $79 million of outstanding bonds issued in 2006. Cardinal’s debt is secured by a revenue pledge of the obligated group as well as a mortgage on the Ball Memorial Hospital campus. The obligated group consists of Ball Memorial, Cardinal Health System, and Blackford Community Hospital. The system’s bonds are issued through the Delaware County Hospital Authority.

Last year the system replaced its chief executive officer in an attempt to improve a deteriorating relationship with its physicians. It also faces significant competition from external physicians who work in the east-central Indiana region. The weak economy has led to an increase in bad debt and charity care throughout the system.

“The outlook revision to negative from stable reflects our belief that management will face significant challenges as it attempts to turn around operations after a material decline in operating performance,” Moody’s analyst Jae Choi wrote in a recent report on the revision.

Cardinal Health’s strengths include rising inpatient admission numbers and a dominant market share in the area. Management also expects to form several joint ventures with its physicians in 2008, a move that has historically brought in several million dollars in additional revenue. In addition, Management has also hired financial health care advisers and consultants Kaufman, Hall & Associates to help improve operations.


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