CHICAGO - After years of financial problems, Ohio's Forum Health this week filed for Chapter 11 bankruptcy, leaving uncertain how much bondholders would ultimately recover as the system moves through the reorganization process.

Moody's Investors Service and Standard & Poor's cut the system's already below-investment grade debt deeper into junk territory following the filing.

In downgrading the debt to Ca from Caa2, Moody's analysts warned that the recovery value of the bonds will be "notably less than 100% and consistent with a Ca rating level."

Standard & Poor's cut its rating to C from B-plus. Both agencies maintain a negative outlook on the system, warning of possible future downgrades depending on the outcome of the reorganization.

The Youngstown-based, three-hospital system plans to remain open through the bankruptcy proceedings. A judge this week agreed to allow Forum to use its cash collateral to fund continuing operations. The motion also included some extended protections for bondholders and other secured creditors, according to Forum's chief attorney.

Formed in 1997, Forum is the second-largest employer in Mahoning County. The system has during the last few years been in talks with at least two providers, including Catholic Healthcare Partners, to sell some of its assets, and has tried to implement a turnaround plan to improve operations. Despite some slight improvements, the system opted this week to file for Chapter 11 in the U.S. Bankruptcy Court of the Northern District of Ohio.

In a statement, Forum's chief executive officer called the filing a "decisive and proactive step in the ongoing effort to drive the system forward toward long-term success and financial vitality."

Forum Health officials said they would continue to make interest payments with cash, but they want to start to make principal payments from the debt service reserve fund, according to Standard & Poor's. All future interest and principal payments are subject to bankruptcy court approval.

Forum has four outstanding bond issues totaling about $140 million. Its debt service reserve fund holds $54 million. All bonds were sold through Mahoning County, and are secured with a gross revenue pledge and mortgages on the system's primary facilities.

On the bond side, secured creditors include U.S. Bank, the trustee representing the bondholders; MBIA Insurance Corp., which insures $112 million of debt sold in 1997; JPMorgan Chase Bank NA, which declined to renew its original standby bond purchase agreements on one of the bond series that are now being repaid under a five-year loan plan; and Fifth Third Bank, which supplies a letter of credit on another bond series.

Rating analysts warned it was likely that bondholders would not receive full payments on their debt going forward.

"The negative outlook reflects the uncertainty surrounding future principal and interest payments to bondholders, and the potential for a lowering of the rating to D should a payment be missed," Standard & Poor's credit analyst Stephen Infranco wrote in a release on the downgrade.

In court Wednesday, bondholders and other secured creditors were given some additional protections - primarily, additional liens on property and equipment held by members of both the obligated and non-obligated group, according to Michael Gallo of Nadler Nadler & Burdman Co., Forum's chief attorney.

"At this point in time it's business as usual for the company," Gallo said. "We made a representation that the lenders are fully secured."

In 2008, Forum reported an operating loss of $18 million and debt service coverage of less than one times. Liquidity has declined to only 17 days cash on hand.

The next hearing is scheduled for April 1.

As of Dec. 19, 2008, a piece of Forum Health's 2002 debt was trading at an average price of 46 cents on the dollar. A search of several bond maturities showed no trading activity since the bankruptcy filing Tuesday.

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