Standard & Poor's Ratings Services said it lowered its rating to A on Connecticut Health & Educational Facilities Authority's series F bonds issued for Lawrence & Memorial Hospital (L&M).

The outlook is negative.

"The lower rating reflects three years of declining operating results and recent balance sheet deterioration with additional debt and weaker days' cash on hand than historical levels," said Standard & Poor's credit analyst Jessica Goldman. L&M recently issued additional debt to reimburse the hospital for capital expenditures. Also, in June 2013, L&M acquired Westerly Hospital out of receivership, and it has been mildly dilutive to the balance sheet.

The unexpected additional debt coupled with the recent operating challenges has left L&M's financial profile more in line with the A rating. Market share remains a positive credit factor and solid unrestricted reserves to long-term debt continue to be a credit strength. Another credit factor is the recent staff strike going on at the facility, this turmoil will further challenge operations at least in the current fiscal year.

"The negative outlook reflects continued ongoing operating challenges and volume declines that could continue into fiscal 2014," added Goldman.

The agency could consider a lower rating during the next one to two years if operating margins fail to increase to more than 2%, or if coverage is not approaching historical levels, closer to 4x. A strained or prolonged strike could also lead to a downgrade.

Should L&M maintain its operating margin at greater than 2.5%, with pro forma balance sheet metrics at or near current levels during the next one to two years, the agency could return the outlook to stable. S&P expects increases in operating profitability to come from a combination of revenue growth and expense control, and not just from expense cuts.

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