Moody’s Investors Service downgraded the Jewish Hospital & St. Mary’s HealthCare to Baa1 from A3 with a negative outlook Friday.

The action affects $377 million of outstanding 2008 fixed-rate revenue bonds issued by the Louisville and Jefferson County Metropolitan Government.

“The rating downgrade is attributable to declining inpatient and outpatient volumes and the continuation of operating losses resulting in poor operating cash-flow margins and weaker debt metrics,” analyst Kay Sifferman wrote. “Operating performance declined in fiscal years 2009 and 2010 after two years of improvement, and are contrary to our expectations.”

Despite a moderate debt load, the poor performance resulted in debt-to-cash flow of over eight times and peak debt-service coverage of around two times.

Unrestricted liquidity has benefitted from reduced capital spending but is no longer reflective of a rating in the A category, according to Sifferman. She added that the rating may be pressured in the near term if losses continue or capital spending increases due to competition.

“The negative outlook reflects our concerns with continued pressures on volumes in this highly competitive market with two sizable competitors,” she said. “The weaker economy is likely to drive continued declines in overall market volumes, which providers will be striving to capture in order to maintain market share.”

The hospital will be challenged to recover from seven straight years of operating losses, including fiscal 2010, Moody’s said. Liquidity is modest, resulting in a weaker cash-to-debt ratio. The hospital also is in a highly competitive market.

Sifferman said the hospital continues to operate without a permanent chief executive officer while the board undergoes merger talks with Catholic Health Initiatives and the University of Louisville Hospital to form a new company.

The merger, anticipated to conclude in the second half of 2011, would provide a greater than 40% market share in Louisville and create the state’s largest health system with 11 acute-care hospitals. The new system would have more than 3,000 physicians and 84,000 admissions.

Sifferman said it’s not known what would happen with the outstanding debt of Jewish Hospital & St. Mary’s as a result of the merger, which was not considered in the analysis that led to the downgrade of the hospital’s rating to Baa1.

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