DALLAS — Standard & Poor’s downgraded its rating on $1.1 billion of debt issued for the Memorial Hermann Healthcare System in Houston. Analysts lowered the rating on several series of bonds issued by the Harris County Health Facilities Development Corp. for the system to A from A-plus, citing “worsened key balance sheet ratios for fiscal 2007” caused by the renegotiation and capitalization of a lease agreement.In July, the system changed the terms of a lease for its Memorial City Medical Center in the western suburbs of Houston that resulted in “a dramatic and dilutive effect on key balance-sheet metrics,” according to analysts.The accounting change increased the system’s long-term debt by $500 million, and raised the leverage ratio to 50% while lowering the cash-to-debt ratio to 45%, Standard & Poor’s analysts said.When the medical center takes occupation of a new tower and garage, which is expected in 2009, the lease payments will increase annually, eventually rising by 13.14% in 2015 and by that same rate every five years thereafter, analysts said.The outlook remains stable and credit strengths include the system’s nearly 25% market share. Memorial Hermann, which is celebrating its 100th anniversary this year, has 14 hospitals and numerous specialty facilities across the Houston metropolitan area.

“The stable outlook reflects Memorial’s excellent market position, consistent financial performance, and our expectation that with Memorial’s large facilities expansion program now significantly completed, those operations should allow it to increase unrestricted cash levels over the near term,” said Standard & Poor’s credit analyst Kevin Holloran.The rating agency also expects the system to maintain its “excellent business position in the highly competitive Houston health care market by virtue of its size and strategic locations.”Memorial includes nine acute-care hospitals, three heart and vascular hospitals, a children’s hospital, one rehabilitation hospital, and 27 sports medicine and rehabilitation centers. New hospitals on the Katy and Sugar Land campuses and expansions of the cardiology, cardiovascular, and neurosurgery service lines on another campus have recently been completed.As a result, the system now has limited future financing needs and doesn’t anticipate issuing any new-money debt for the next several years, which factors into the new rating, according to analysts.Hollaran said the decision by the system’s auditor to capitalize the new lease was the driving factor in the downgrade, but once management can bring the balance sheet back in line with A-plus medians, the rating would most likely go back up.“The net debt impact was a lot to swallow in one review,” he said. “It had an impact on some key balance-sheet metrics that were already under stress to remain at the A-plus level.”Neither Fitch Ratings nor Moody’s Investors Service rates the underlying credit of Memorial Hermann.First Southwest Co. is the financial adviser to the issuer and Fulbright & Jaworski LLP serves as bond counsel.

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