Moody’s Investors Service this week downgraded the underlying rating of Marietta Area Health Care to Ba2 from Ba1. Washington County issued the debt on behalf of the hospital.

The downgrade affects $38.5 million of revenue bonds. Marietta has another $33 million of outstanding debt supported by letters of credit that is not rated by Moody’s. The outlook remains negative.

The main reason for the downgrade is the system’s risk-laden debt portfolio.

“One of the key drivers of the rating downgrade and negative outlook are the elevated credit risks associated with Marietta Area Health Care’s debt structure, with 63% variable-rate debt obligations, including $25.6 million of variable-rate bonds supported by letters of credit and $21.3 million of variable-rate bonds supported by a standby bond purchase agreement,” analyst Deepa Patel wrote in a report on the downgrade.

“Our concerns are [that] the high demand debt and bank exposure leaves MAHC vulnerable to interest-rate variability, renewal and acceleration risk, unremarketed tenders, or unexpected claims on liquidity should an event of default occur or any outstanding bank bonds are accelerated by the liquidity provider,” he said

Adding to the pressure are several financial covenants tied to the bond and bank agreements that Marietta has breached in the past or is in danger of breaching, according to Moody’s.

“MAHC is currently in compliance with all covenant requirements but maintains very thin headroom under the days’ cash on hand covenant, which was measured at 91.4 days for the obligated group at June 30, 2010,” Patel wrote.

The system has a total of four floating-to-fixed rate interest rate swaps tied to $40 million of debt.

MAHC operates the 146-bed Marietta Memorial Hospital and the 25-bed Selby Hospital, a critical-access facility, both located in Washington County. The system maintains a 61% market share in the county.

In addition to the challenges with its debt portfolio, Marietta has a high number of Medicaid and Medicare patients and serves an aging population in an economically weak area, according to Moody’s.

On the bright side, management has improved operating performance for the first 10 months of 2010 by cutting costs and other moves, analysts said. Selby has seen some improvement in its operating performance due in part to new operating rooms that opened in June 2010. 

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