New Jersey officials are holding out for better market conditions on a $169 million Solaris Health System refinancing that's part of the state's Hospital Asset Transformation Program.

The New Jersey Health Care Facilities Financing Authority will most likely issue the debt early next year on behalf of Solaris. The deal will benefit from the state's appropriation pledge, one notch below its double-A general obligation ratings. The health care provider will need the boost as Standard & Poor's and Moody's Investors Service rate a portion of Solaris' debt below investment grade.

Last week, Standard & Poor's downgraded to BB from BBB-minus JFK Medical Center Series 1998 bonds and $18.5 million of Muhlenberg Regional Medical Center Series 2000 bonds. The outlook is negative.

In October, Moody's revised $103.7 million of currently rated JFK debt to negative. That follows Moody's downgrade of the 1998 JFK bonds and the 2000 MRMC bonds to Ba3 from Ba1 in June.

Ambac Assurance Corp. insures the 2000 Series while MBIA Insurance Corp. insures the 1998 bonds.

"Right now we're really waiting on the market," HCFFA executive director Mark Hopkins said. "The actual downgrades I don't believe are going to affect our decision to move forward because they are state-appropriation backed bonds ... I'm pretty sure we're not going to go until at least January."

Moody's and Standard & Poor's cited Solaris' inability to refinance the debt in 2008 as one factor, along with declining revenues and a weak balance sheet, in the credit change. The Muhlenberg campus ended its in-patient services in mid-August, yet costs of the closure dipped into Solaris' cash flows, according to Hopkins.

Diverting Muhlenberg's acute-care business to the JFK facility, which is 5.5 miles southeast of MRMC, allows Solaris to refinance outstanding debt through state appropriation. In that arrangement, the state pays for the debt service yet also receives an equal amount from Solaris, via the financing authority, so there is no net cost to New Jersey.

"While Muhlenberg's closure should allow the system to return to profitability during the next one to two years, the thin balance sheet and challenging reimbursement environment will likely exert continued pressure on the already thin financial profile," said Standard & Poor's rating analyst Charlene Butterfield in a prepared statement.

"If management fails to complete the bond issue and the system fails to return to profitability so that coverage and balance sheet metrics reach levels commensurate with the rating, a further downgrade will be warranted during the next one to two years."

Solaris has met all its debt service payments on its bonds, yet the health care provider is in default on the Series 2000 bonds due to covenant failures relating to debt-service coverage ratios and cash-on-hand requirements. In addition, the Muhlenberg facility generated operating losses of $2.9 million and $16.7 million in 2006 and 2007, respectively, according to Muhlenberg's last independent auditor's report, ending Dec. 31, 2007.

Along with the JFK Series 1998 and the MRMC Series 2000 mentioned above, the transaction will refinance additional outstanding JFK debt, including Series 1993 for $12.3 million, Series 1995 for $21.2 million, Series 2003 for $16.2 million, and Series 2005 for $18 million.

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