Standard & Poor's Ratings Services said it lowered its rating to B-plus from BB on Gerald Champion Regional Medical Center (GCRMC), N.M.'s $71 million series 2012A bonds, and at the same time placed the B-plus rating on CreditWatch with negative implications pending clarification of a possible covenant event of default and its potential implications.

"The rating change and CreditWatch designation reflect our view of GCMRC's worse-than-budgeted operating loss and its effect on debt service coverage," said Standard & Poor's credit analyst Karl Propst. "We understand that the loss was caused by declining patient volumes, increased bad debt and charity costs, and reimbursement reductions associated with the state's cut to Medicaid funding, as well as a reduction in sole community provider funds, a delay in receipt of those funds, and reimbursement reductions occurring under federal sequestration," continued Propst.

A potential for a breach in financial covenants could lead to an event of default under the bond documents. Should an event of default be declared, the rating will likely face immediate negative pressure.

However, if, during the one-year outlook period, even absent an event of default, GCRMC is unable to stem the decline in volumes and restore operating performance to a level that will be consistent with projections for fiscal 2014, then an additional rating downgrade is likely, particularly if maximum annual debt service (MADS) coverage remains below 1.0x.

A positive rating action is possible over time in response to improved patient volumes, above break-even operating performance, a minimum of 1.75x MADS coverage, and no less than 90 days' cash on hand; these improved metrics will need to be sustained over an extended period.

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