CHICAGO - Loyola University of Chicago has stepped up to help its ailing health system with an infusion of $19 million in cash, a move that staved off the system's violation of bank liquidity terms and the loss of its investment grade credit.

However, the potential fiscal burden of the Loyola University Health System also now threatens the university's own more solid credit standing. Moody's Investors Service moved to place the school's A2 underlying credit on its watch for a possible downgrade because of the financial pressures LUHS places on its credit. The action impacts $209 million of university debt.

"Our review will focus on the university's future financial relationship with LUHS, as well as its debt profile, market position, operating projections and capital plans. We expect to conclude this review within the next 90 days," analysts wrote.

The university's financial profile has improved significantly in recent years, with Moody's last action on the credit being an upgrade from A3 in March 2007.

The action on the university's credit came one day after Moody's downgraded the health system, a separate credit from the university, to Baa3 from Baa2. It also warned of the possibility of further negative action by assigning a negative outlook. The move impacts $369 million of outstanding debt issued through the Illinois Finance Authority.

Analysts attributed their concerns to a large receivables write-off for fiscal 2008 of $29 million that suggests income in past years was overstated, operating losses for the first half of fiscal 2009 and a narrowing of liquidity that puts the system at risk of violating its letter of credit covenants.

"Loyola is facing acute liquidity issues even with the system's recent efforts to bolster its liquidity position," analysts wrote.

The combination of operating losses of $32 million in fiscal 2008, investment losses and the need to post swap collateral have taken a toll on the system's liquidity, leaving it with just 56 days cash on hand at the close of November. That number is expected to grow to 75 days by the end of the year due to the release of $38 million of self-insurance funds and $19 million from the university.

Like other health care systems across the country, Loyola is struggling with rising debt and charity care costs in addition to increased personnel costs associated with the opening of its new tower last spring, growing supply costs and other expenses.

LUHS responded to the downgrade saying some of its problems stem from a state delay in paying its bills and officials believe recent measures will help improve the system's financial profile.

"We are ending the calendar year on a positive note," a statement read. Officials also note that they have additional insurance reserves if needed to remain in compliance with bank liquidity terms.

They system remains challenged by its investment allocation of 40% of unrestricted cash invested in equities and interest rate risk in its debt portfolio with 69% of debt supported primarily by bank letters of credit. The various agreements include coverage, liquidity and rating requirements that could force LUHS to retire debt more rapidly or post collateral if it loses its investment grade credit, debt service falls below 1.1 times or liquidity falls below 60 days at the close of its fiscal year.

Moody's views the system's derivatives program - that includes three swaps totaling $310 million - as risky because of the burden possible termination payments and collateral requirements pose to the system's balance sheet. LUHS has posted $28 million in collateral as any further downgrade could trigger a termination event.

The system's strengths include a prominent market position in the Chicago area, savings of $48 million, including $30 million expected in the current fiscal year, due to various cost-cutting initiatives being undertaken and its relationship as a wholly-owned subsidiary of Loyola University which carries an A2 rating.

The university's commitment of $19 million spared LUHS from violating its bank covenants, but analysts remain concerned over the credit because of its weak cash position and the difficulty of reversing operating losses.

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