Michigan Hospital Fails to Make Payment

CHICAGO - A hospital in financially-troubled Pontiac, Mich., has defaulted on its most recent payment due for $35.8 million of debt remaining from a 1993 bond issue.

The 366-bed North Oakland Medical Center failed to make a debt service payment owed on Jan. 15 to the bond trustee, US Bank NA. That prompted a default on the payment of $946,350 owed to bondholders on Feb. 1, according to the bond default documents.

The Pontiac Hospital Finance Authority was the conduit issuer for $51.8 million of bonds sold on the hospital's behalf in 1993. The bonds are a general obligation of the medical center.

One source said the hospital was set to talk with bondholders today over the default. Hospital officials did not return calls for comment. The next payment is due in August.

The default prompted Standard & Poor's to downgrade the bonds to a D rating from the below investment grade rating of B. Moody's Investors Service late yesterday cut its rating on the bonds to C. Both rating agencies have downgraded the hospital several times in the last few years citing ongoing financial losses.

In secondary market trading this week, bonds with a 6% coupon due in 2023 were trading at about 51 cents on the dollar, according to data provided by the Municipal Securities Rulemaking Board.

One of three hospitals in the area, North Oakland Medical Center lost $12.3 million in fiscal 2007. At the end of the year, the hospital held only $4.6 million in unrestricted cash, which is equal to 18 days of cash on hand. The 2007 losses are part of a larger fiscal crunch - between 2001 and 2005 the hospital lost a total of $20 million from operations.

"Although a new management team was able to reduce expenses by $23 million over the past two years, revenue decreased at a faster rate resulting in increasing losses," wrote Standard & Poor's analyst Cynthia Keller Macdonald.

Part of the problem is competition, as the area with a population of 66,000 is served by two other hospitals, including Joseph Mercy Oakland, which is part of Catholic health care giant Trinity Health.

Also contributing to the hospital's financial pressure is a $1 million lease agreement it has held with the city since 1993. The hospital has sought to renegotiate its annual payments to the city but has so far been unsuccessful, according to analysts.

Last year, the hospital paid the city only $600,000 of its annual $1 million payment - and told the city that it "did not anticipate being able to make any payments in the foreseeable future," according to the city's 2007 audit.

Fitch Ratingsrecently revised its outlook to negative for two tax increment bond issues associated with Pontiac, citing in part the city's ongoing annual deficits. The agency at the same time affirmed a CCC rating on a $6.2 million in tax increment revenue bond issue, and a BB-minus rating on a $5.3 million in tax increment revenue bond issue.

Fitch also downgraded a $1.4 million limited-tax GO bonds issued by the Pontiac General Building Authority to B-minus from B-plus and assigned a negative outlook.

A struggling town in otherwise affluent Oakland County, Pontiac is located 31 miles from Detroit. The city suffers from a 17.1% unemployment rate and a workforce dominated by General Motors Corp., which has consistently laid off workers over the years.

The city is on track to end fiscal 2008 with a $1.8 million deficit - leading to a total fund deficit of $6.2 million, more than 14% of the city's general fund spending. In January the state assigned an assistant state treasurer to work with Pontiac to try to resolve some of the problems. If that fails the state would consider appointing an emergency fiscal manager, who would take over the city's management.

 

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