MaineGeneral Medical Center’s $281 million in debt was cut to speculative grade by Moody’s Investors Service, which cited weakening cash flow and slower revenue growth due to Medicare and Medicaid cuts.

Moody’s cut the rating to Ba1 from the investment-grade Baa3 and switched its outlook to negative from neutral in a report Thursday. Much of the expected downturn in performance is being attributed to costs associated with a new hospital, Moody’s analysts wrote.

“We are disappointed with the downgrade,” said MaineGeneral chief financial officer Mike Koziol.

The center is consolidating two inpatient units into a single facility in November, a process that will cost some money in the short term but will be advantageous in the longer term, he said.

“We think it will just be a bump in the road,” Koziol said.

The center’s operating cash-flow margin fell to 6.9% in fiscal 2013 from 8.5% in fiscal 2012, according to Moody’s. The hospital’s fiscal 2013 ended on June 30.

The deterioration was largely related to minimal revenue growth due to Medicare and Medicaid cuts, increasing bad debt and charity care, and lower inpatient volumes, Moody’s assistant vice president Sarah Vennekotter and associate managing director Lisa Goldstein wrote.

The hospital has a very heavy debt burden, demonstrated by a weak Moody’s-adjusted maximum annual debt-service coverage of 1.46 times. Based on fiscal 2013 financial statements, it also has a debt-to-revenue ratio of 76% and cash-to-debt ratio of 36%.

There is little to no population growth in the center’s service area and the population is aging, which will increase the system’s exposure to Medicare, the analysts wrote. The center expects its financial performance will deteriorate in fiscal 2014. It expects a negative 3.9% operating margin.

On the plus side, the analysts noted that Maine recently gave $48 million to the center in back due MaineCare payments. The center also is the market leader in the Kennebec Valley region, according to S&P.

Moody's analysts assigned the negative outlook because they believe operating cash flow will decline in fiscal 2014 and fiscal 2015.

The new hospital in Augusta has been built on time and under budget, Koziol said. The center has already sold its two other hospital buildings and has been leasing them back.

The new hospital will be more efficient and a state-of-the-art facility, Koziol said. The staff will be happier because they will not have to commute frequently between a hospital located in Augusta and another located 20 miles away in Waterville, he said.

Bond covenants bar the center from selling bonds for at least five more years, Koziol noted. In June Fitch Ratings rated the center’s debt at BBB-minus with a stable outlook.

An earlier version of this story incorrectly stated that Standard & Poor's has a negative outlook on the center. Moody’s has a negative outlook. S&P does not rate the center.

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