BRADENTON, Fla. — The 198-bed Citrus Memorial Hospital, near the west coast of Florida, sank further into non-investment-grade territory Wednesday when Moody’s Investors Service downgraded its debt to Ba3 from Ba2.

The drop affects $39.4 million of outstanding bonds issued in 2002. Moody’s said the outlook remains negative.

CMH also has $9.2 million of variable-rate bonds issued in 2006 and $9.22 million of 2008 variable-rate notes outstanding that are not rated.

Moody’s action reflects poor operating performance through the first four months of fiscal 2012, a material decline in liquidity, and an ongoing legal dispute regarding hospital governance, according to analyst Carrie Sheffield.

“The downgrade and negative outlook also reflect the upcoming test date for the liquidity covenants on the bank notes and the current level of days’ cash on hand, which is below the covenant,” Sheffield said.

At the end of January, the hospital had $27.1 million, or 58 days, of cash on hand, down from $38.3 million, or 80 days, at the end of fiscal 2011. The decline is due to practice acquisitions and problems implementing a new computer system.

Sheffield said CMH did not meet covenant requirements on the two nonrated bank-qualified loans as of Jan. 31.

CMH also suffers from decreasing inpatient admissions and surgical procedures, and high exposure to Medicare at 69% of its payer mix. Medicaid was 6.7% of revenues.

Another concern is an ongoing legal dispute between the Citrus County Hospital Board and the Citrus Memorial Health Foundation.

The private, nonprofit foundation runs the hospital through a long-term lease with the hospital board, which levies property taxes for the system.

The two have been locked in a legal battle over operations and funding for several years.

CMH’s 2010 audit said the hospital board collected $10 million in ad valorem taxes, though it provided $1.6 million to the foundation. Another $1.2 million was due to the foundation from fiscal 2009.

Moody’s, which first dropped the hospital’s rating below investment grade last year, said ongoing governance disruptions “contributed to the impairment of the hospital’s financial health.”

Gov. Rick Scott signed a bill last year strengthening the control of the hospital board, which is an independent special district. The foundation then challenged the law in court, but a judge upheld the law last month.

The hospital board recently offered to enter settlement negotiations with the foundation.

Mark Williams, chief financial officer for Citrus Memorial Hospital, could not be reached for comment by press time.

Fitch Ratings downgraded the hospital’s 2002 bonds in early 2011 to BB-plus from BBB, citing similar concerns about the ongoing dispute. Fitch said its negative outlook reflected the “risks and uncertainties surrounding the acrimonious relationship” between the board and the foundation.

Despite junk-level ratings, CMH’s 2002 bonds continue to trade at high levels. On Feb. 29, a customer bought $50,000 of bonds maturing in 2032 for $97.50 at a yield of 6.6%.

The hospital is about 70 miles north of Tampa in Citrus County, which has a population of 141,236.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.