Standard & Poor's Ratings Services said it lowered its long-term rating and underlying rating on Massachusetts Development Finance Agency's series 2010C and 2013G fixed rate bonds issued for Lowell General Hospital to BBB from BBB-plus.
The outlook is stable.
"The downgrade reflects persistent operating pressure that has resulted in earnings performance below expectations since LGH affiliated with Saints Health System in July 2012," said Standard & Poor's credit analyst Cynthia Keller.
At the time of the transaction S&P assigned a negative outlook reflecting the potentially dilutive performance from Saints Health System while also recognizing that the affiliation, by eliminating LGH's main competitor, would likely improve the organization's enterprise strengths. While LGH has made significant integration progress, there have been challenges which when coupled with significant industry pressures, have weakened earnings.
The improved enterprise profile including strong market position, material size and scale in the market, experience with nontraditional contracting, and strong physician relationships are factored into the BBB rating and help offset financial metrics, which are generally below rating level medians. "The consolidated system posted a substantial operating loss in 2013 and losses have continued into the first half of fiscal year 2014 with management projecting another operating loss this year. While the system's balance sheet has held up well, partially due to asset sales, it does not provide a sufficient cushion to preclude a downgrade during this multi-year period of weak operations and thin debt service coverage," added Keller.
The stable outlook is supported by LGH's improved market position with the elimination of local competition in Lowell and reflects the agency's expectation that LGH will translate this strength into improved earnings sufficient to generate debt service coverage near the BBB median.
A lower rating could be possible with continued operating losses or with additional debt without a commensurate increase in unrestricted reserves. While there have been recent improvements in LGH's balance sheet, primarily from asset sales, metrics generally remain under levels posted before the affiliation. A higher rating during the outlook period is not likely as LGH will need to establish a multiyear trend of positive operations that generally produce near 2.5x debt service coverage while also growing unrestricted reserves to approximate outstanding debt, which under the original projections was anticipated by the end of fiscal year 2015.
