CHICAGO - A pair of struggling Midwestern hospitals lost their investment-grade ratings from Standard & Poor's last week. Both are suffering from extremely low liquidity - an increasing concern for rating analysts - and recent operational losses.

Standard & Poor's cut its rating to BB-plus from BBB on Wyoming, Mich.-based Metropolitan Health Corp., located outside Grand Rapids. The agency also warned of further action, assigning a negative outlook.

Skaggs Community Health Center in Branson, Mo., saw its rating drop three notches to BB from BBB with a negative outlook. The lowest investment grade rating is BBB-minus.

For Metropolitan, also known as Metro Health, the downgrade to junk status affects $135 million in debt issued in 2005 to finance construction of a new hospital. Last year was Metro Health's first full year in the new facility and it spent about $10 million more in move-related costs than it expected, said Standard & Poor's analyst Antionette Maxwell.

"We made the determination, based on a challenged 2008 fiscal year, which resulted in large operating losses coupled with a huge drop-off in cash reserves that made their cash position very anemic, to lower the rating two notches and place it on negative outlook," Maxwell said.

The system had expected to lose $1.3 million last year but ended up losing more than $11 million. While it has seen some improvements in its fiscal position so far in 2009, analysts are concerned about its ability to sustain the improvements given the current economy and market, Maxwell added.

Metro's liquidity has declined to 29 days cash-on-hand for the eight months ended Feb. 28, 2009 - a decline that leaves the issuer with little financial flexibility, said Standard & Poor's.

Metro Health has a total of roughly $185 million in outstanding debt, of which Standard & Poor's rates $135 million. The Kent Hospital Finance Authority issued the debt on Metro Health's behalf. Neither Moody's Investors Service nor Fitch Ratings rate the hospital. The bonds were last traded April 29, the day before the downgrade, with a 9% yield, according to Thomson Reuters.

On the bright side, volume at Metro's new facility is up and management has started a number of initiatives meant to cut costs, including freezing its pension and benefit plan.

Skaggs, a 152-bed acute-care hospital, dominates its regional market in Missouri but has seen a negative operating margin over the last 10 months, among other challenges, according to Standard & Poor's analyst Brian Williamson.

"Liquidity at Skaggs has always been thin, in our view, and remains weak with only 37 days' cash on hand as of Feb. 28, 2009," wrote Williamson in a news release on the downgrade. Maximum debt service for the first 10 months of fiscal 2009 totaled just 0.7 times compared with 2.3 times for fiscal 2008.

The positions of chief executive officer and chief financial officer are both vacant right now, adding to Skaggs' problems, Williamson said.

The downgrade affects $40.6 million in debt issued in 1998 and 2005 by the Taney County Industrial Development Authority.

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