Five-notch downgrade to junk as pressure mounts on an Iowa hospital

CHICAGO – Mercy Hospital in Iowa lost its investment grade rating and fell deep into junk territory as fiscal pressures mount.

Moody's Investors Service dropped the rating five notches to B1 from Baa2 Thursday on $71 million of hospital debt issued through the city of Hills, Iowa. Moody’s has it under review for a further downgrade. Moody’s had previously put the rating on review for a downgrade in May.

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The Moody's Investors Service Inc. logo is displayed outside of the company's headquarters in New York, U.S., on Tuesday, Feb. 21, 2012. Moody's Corp. is a credit rating, research, and risk analysis firm. Photographer: Scott Eells/Bloomberg

“The downgrade to B1 reflects the unexpected and material variance in fiscal year 2017 to prior expectations and continues the recent trend of weak performance,” Moody’s wrote. “Additionally, the downgrade incorporates the likelihood of an increasing cash burn due to longer-than-anticipated impaired operations and presence of an underfunded pension plan.”

The hospital’s fiscal downturn has been driven by escalating losses at the system's physician practice plan, reduced inpatient volumes and strong competition from the University of Iowa Hospital.

“Recent negative results reflect the prolonged delay to find a long-term partner and contributed to the weakened run rate,” Moody’s added.

The downgrade is exacerbated by an expected breach of rating triggers that would substantially weaken liquidity upon acceleration, Moody’s said. Placement on rating review assumes a rating trigger covenant breach which could result in immediate acceleration of all outstanding debt which totals $94.6 million.

“Uncertainty around the system's debt restructuring and potential depletion of liquidity further support the rating under review,” Moody’s said. Mercy has been making its debt service payments on time and in full. The hospital has sufficient unrestricted cash that could be used in the event of an acceleration on all outstanding debt.

The hospital’s 2011 fixed rate bonds and Series 2008 variable rate bonds are an unsecured obligation of the master trust indenture with a security interest in the unrestricted receivables of the hospital, Moody’s said.

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