BRADENTON, Fla. – East Jefferson General Hospital in Louisiana saw its bond rating lowered further into junk territory with Moody's Investors Service predicting a potential default by year’s end.
EJGH’s $152 million of outstanding revenue bonds were downgraded to B3 from Ba3 by Moody’s on Aug. 18. The debt was issued by the Jefferson Parish Hospital Service District No. 2.
The outlook remains negative.
The B3 rating reflects the hospital’s “significant” negative variance to its budget in fiscal 2016, which continued at an accelerated rate through the first half of 2017, according to analyst Safat Hannan.
“Absolute and relative liquidity levels continue to decline with an expectation of further cash burn by year end,” Hannan said. “We expect there is a high likelihood of a covenant violation with EJGH falling below its required debt service covenant of 1 times measured at fiscal year-end, which would trigger an event of default.”
The 420-bed acute-care hospital is in Metairie, part of the highly competitive metro New Orleans market. EJGH is a component unit of Jefferson Parish, which appoints the board of directors.
Prior merger discussions have failed and contributed to declining patient volume, Moody’s said, adding that new management is devising a turnaround strategy.
“We fully expected this rating change,” said Gerald Parton, who became chief executive officer in June. “Our cash position remains very strong with a fully funded debt service reserve fund.”
Parton said the hospital has developed a turnaround plan focused on volume growth, reimbursement enhancement, and expense reduction strategies. Bob Riley became the hospital’s chief financial officer in January.
“The board is confident that our new management team will continue to deliver solutions to improve our financial future,” said chairman Henry Shane. “Our focus, as always, is on our patients and providing the highest quality of care to the community we serve.”
East Jefferson General Hospital’s bonds were rated BB, with a negative outlook, by S&P Global Ratings in July 2016.
The hospital’s fiscal 2016 results showed continued losses with a $15.8 million operating deficit and operating cash flow of $19.6 million, according to Moody’s. Performance through the first half of this year shows an acceleration in the decline of operating performance. Through June 30, the operating margin was down 7.8% and operating cash-flow margin of 1.2% is “much lower” than the prior year, which was 8.4%.
The continued decline in performance is attributed to volume pressures, a shifting payor mix more toward governmental and self-pay, and less commercial business following Louisiana’s Medicaid expansion in July 2016, as well as the loss of a large obstetrics group, Moody’s said.
“A number of strategies are underway to thwart further decline, including renegotiating physician practice and payor contracts, streamlining pharmacy operations and limiting discretionary spend,” Hannan said.
East Jefferson General Hospital maintains fixed-rate debt that matures in 2041. Aside from the Series 2011 bonds, the hospital has $1 million in capital leases and notes outstanding. There are no derivatives.
Moody’s said its negative outlook reflects the expectation that there will be further deterioration in financial performance in the near term, resulting in an elevated risk of a rate covenant breach that would be a default and could lead to debt acceleration.
“The inability to stabilize performance and a continued decline in liquidity, or filing for creditor relief, will result in downgrade pressure,” Hannan said.