BRADENTON, Fla. — Cullman Regional Medical Center in Alabama, has had its ratings dropped to below investment grade by Fitch Ratings and Moody’s Investors Service about a year after refinancing all its bonds.
Fitch downgraded Cullman Regional’s rating to BB-plus from BBB-minus on Wednesday. Moody’s dropped its rating to Ba1 from Baa3 on Nov. 23. Both agencies revised their outlooks to stable from negative.
The downgrades affect nearly $70 million of fixed-rate debt sold on behalf of the hospital by the Cullman County Health Care Authority. Analysts said the contributing factors include weak financial metrics, variable and unprofitable operations, and a high debt load.
Cullman Regional is a 115-bed, acute-care general hospital located 50 miles north of Birmingham.
Jete Edmisson, the hospital’s chief operating and financial officer, was attending a strategic planning meeting Monday and was not immediately available for comment, according to his office spokesperson.
“The downgrade to BB-plus reflects CRMC’s continued weak financial performance that is not reflective of an investment-grade credit, including low liquidity levels, unprofitable operations, and nominal debt-service coverage,” said Fitch analyst Emily Wadhwani. “Additional credit concerns include a significant rise in bad-debt expense, coupled with an unfavorable payor mix.”
Cullman Regional’s financial performance was stable at the lower rating. The hospital’s main credit strength is its market position as the county’s only community medical care provider. However, its liquidity position provides little cushion, she said.
Cullman Regional had 96.7 days’ cash on hand Sept. 30. Its liquidity levels have “remained stable” from 98.5 days at the end of fiscal 2009. Operations have also remained stable at a negative $1.5 million operating loss in fiscal 2010 and 2009, Wadhwani said.
Cullman Regional receives approximately $500,000 a year largely from a county sales tax, but those funds help offset the costs of self-paying patients and are considered non-operating income. Through the three months ending Sept. 30, Wadhwani said operations were profitable, with a $415,000 operating gain.
The facility’s first-quarter performance historically is profitable.
For fiscal 2011, Cullman Regional is budgeting an operating gain of $452,000, or a break-even operating margin. Its bad-debt expense increased to $21.5 million in the fiscal year ending June 30, which equates to 18.3% of revenues.
“Management has outlined steps it is taking to reduce the growth in bad debt, including better identification of patient benefits and expected insurance coverage at the time of service,” said a report by Moody’s analyst Daniel Steingart. “Nevertheless, bad debt remains a challenge and without a reduction in bad debt expense, we believe margins will remain suppressed.”
On the positive side, Steingart said Cullman Regional purchased and closed the only competing hospital in Cullman County in July 2009, obtaining an additional 30 licensed beds.
Moody’s said its rating could go up if Cullman Regional has sustained improvement in financial performance and cash flow, reduces leverage through revenue growth or amortization of outstanding debt, and improves liquidity.
Cullman Regional last sold $70.2 million of refunding bonds in November 2009. The deal was structured with serial bonds maturing between 2010 and 2019, and three term bonds maturing in 2023, 2029 and 2036.
The serial bonds sold with yields ranging from 2.37% with a 3% coupon in 2010, to 4.76% with a 4.5% coupon in 2014, to 6.07% with a 5.75% coupon in 2019. The term bonds sold with a yield of 6.5% with a 6.25% coupon in 2023, 7% with a 6.75% coupon in 2029, and 7.25% with a 7% coupon in 2036.