CHICAGO - Michigan's William Beaumont Hospital is expected to enter the market this week with roughly $170 million of revenue bonds after it significantly scaled back its capital plan in the face of operational challenges and a volatile credit market.

In advance of the issue, Fitch Ratings downgraded the Royal Oak, Mich.-based provider to A from A-plus - its second downgrade of the year - and warned that further action could be coming by assigning a negative outlook.

Moody's Investors Service revised its outlook on the credit to negative last week, a few months after it downgraded the system to A1 from Aa3. Standard & Poor's, which downgraded the credit to A from AA-minus in September, affirmed the current rating with a stable outlook.

Moody's warned that its A1 rating is based on an assumed long-term, fixed-rate transaction, and that a different debt structure would trigger an immediate review of the rating and outlook.

Acting through the Royal Oak Hospital Finance Authority, Beaumont is expected to enter the market next week with $169.5 million in a mix of fixed-rate and term-rate hospital revenue and refunding bonds.

Morgan Stanley is senior manager on the transaction, with Goldman, Sachs & Co. and Banc of America Securities LLC also on the team. Miller, Canfield, Paddock and Stone PLC is bond counsel. Kaufman Hall & Associates Inc. is Beaumont's financial adviser.

Proceeds from the $169.5 million issue will be used to refund $60 million of outstanding debt, reimburse Beaumont for $90 million of prior capital expenditures, and fund a debt service account, according to rating reports. The bonds are secured by a gross revenue pledge from Beaumont, a three-hospital system that enjoys a solid share in its market, about 15 miles outside Detroit.

The issue will likely be Beaumont's last for the year. While the Hospital Finance Authority has approved up to $775 million of new-money and refunding debt for Beaumont, the system recently moved to scale back its capital plans in light of ongoing operational challenges and the market.

"Everyone is scaling back a lot of their capital spending at this point due to the market," said Standard & Poor's analyst Brian Williamson. Beaumont "still has some challenges from an operational viewpoint, but we feel the A rating is appropriate at this point in time even though they did scale back some new-money borrowing."

In mid-September Beaumont planned to enter the market with $583 million in new-money and refunding revenue bonds, the first of three series it expected to issue over the next few months.

The move sparked downgrades from all three rating agencies, which warned that the significant increase in debt - more than 50% - would strain an already weak balance sheet. Beaumont ended up postponing the bond sale as a credit freeze gripped the market.

On the operational side, the provider saw a "sharp downturn" in patient volumes in the third quarter of 2008 as well as a decline in liquidity "in light of the increasingly difficult operating environment in southeast Michigan," wrote Fitch analyst James LeBuhn in a release on the downgrade.

Beaumont is projecting a nearly $23 million loss from operations in fiscal 2008, Fitch said. The system's operating revenue in fiscal 2007 totaled $1.85 billion.

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