New Jersey's largest health care entity, Saint Barnabas Health Care System, is in technical default on $768 million of debt issued through the New Jersey Health Care Facilities Financing Authority due to shrinking liquidity.

While Saint Barnabas continues to meet debt service payment obligations, the health care provider is in a non-payment-related default. Saint Barnabas must have at least 60 days cash on hand and maintain debt service coverage of one times to comply with bond covenants, according to Moody's Investors Service. Saint Barnabas expects to fall short of those liquidity requirements.

"While audited financial statements for the fiscal year ended Dec. 31, 2008, are not expected to be available until sometime in May 2009, it is expected that such audited financial statements will reflect that [Saint Barnabas] and the obligated group were not in compliance as of the Dec. 31, 2008, testing date with certain non-payment covenants relating to liquidity and debt service coverage," according to a material event notice filed by the borrower.

Saint Barnabas expects to release today its unaudited financial statements for the fourth quarter of 2008 and will hold an investor conference call on Feb. 18.

However, a spokesperson for the system said Saint Barnabas continues to be financially sound and able to meet all of its financial obligations on a timely basis.

"We will continue to serve the health care needs of our communities with the same high standard of care we have always delivered," the spokesperson said via e-mail. "Because of the current economic environment which has affected institutions of all kinds, we are in technical violation of certain covenants of some of our bonds. This does not have any impact on our operations and we are actively engaged with independent advisers to develop a plan to remedy these violations. We have also begun discussions with bondholders and bond insurers with the goal of amending, modifying, or obtaining a waiver of compliance with the debt covenants."

A large portion of the debt is insured through MBIA Insurance Corp. and Financial Security Assurance Inc. Wachovia Bank NA and JPMorgan Chase Bank NA provide letters of credit on a part of the debt.

In early December, Fitch Ratings dropped Saint Barnabas to BB-plus from BBB, affecting roughly $900 million of debt. The outlook is negative. Fitch cited the credit's possible technical default for the credit change.

On Nov. 19, Moody's affirmed the credit's $850 million of debt sold through the NJHCFFA at Baa2 and revised the outlook to negative. One month before that, Standard & Poor's downgraded the system to BBB-minus from BBB and placed a stable outlook on the credit.

Standard & Poor's analyst Liz Sweeney said its downgrade in October reflected the likelihood of a default.

The health care provider has six acute-care hospitals within its system, including Saint Barnabas Medical Center in Livingston and Newark Beth Israel Medical Center.

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