Fitch Ratings on Friday revised the rating outlook on bonds issued for the Forrest County General Hospital to negative from stable, and affirmed the A rating. The action affects $70 million of 2010 revenue bonds and $43.3 million of 2009 bonds issued on behalf of the hospital by the Mississippi Hospital Equipment and Facilities Authority.
“The outlook revision to negative reflects Forrest Health’s elevated debt burden and pressured profitability,” said Fitch analyst Michael Borgani. “Though liquidity remains good for the rating category, leverage metrics worsened due to new borrowings, and profitability fell markedly below historical norms.”
The debt burden is high for the rating category, Borgani said. In fiscal 2012, Forrest entered into two capital lease agreements totaling $46.6 million and a $20 million bank loan. It also plans to take out a $5 million bank loan in fiscal 2013. Maximum annual debt service including the $5 million bank loan will rise to $20.4 million from $15.1 million.
Debt service coverage was 2.8 times in fiscal 2011 compared to Fitch’s median of 4.1 times for A-rated debt, Borgani said. Annual debt service took up 4.3% of total operating revenue in fiscal 2011 compared to 2.8% for A-rated debt.
“Fitch expects fiscal 2012 profitability to end up well below budget and be shored up solely by $21.1 million in expected supplemental governmental funds,” Borgani said.
Forrest reported $13.3 million in operating income for the 11-month interim period ending Aug. 31, down from the $31.2 million reported the year before.
“This decline reflects depressed inpatient volumes at Forrest General Hospital as a result of implementation of a new electronic medical record system and associated expenses, lower Medicare rates, and rising labor expense associated with the opening of Forrest Health’s Highland Hospital new facility,” Borgani said.
The hospital’s balance sheet metrics exhibit “very good liquidity” relative to expenses as unrestricted cash and investments equated to 213.1 days cash on hand, he said.
Forrest Health is in the second year of a $150.9 million, three-year capital plan. Spending on new construction and renovation activity is expected to culminate with the fiscal 2013 opening of Forrest Health’s Orthopedic hospital, which Fitch views favorably, Borgani said.