CHICAGO - Fitch Ratings downgraded Southeast Missouri Hospital Association two notches to BBB-minus over its operating losses.

The action impacts $93 million of bonds from a 2007 issue sold through the Cape Girardeau County Industrial Development Authority on behalf of the hospital association, which does business as Southeast Health. The hospital has another $60 million of debt from a 2013 issue that was directly placed with a bank and not rated by Fitch.

The rating agency had previously put the hospital's BBB-plus rating on negative watch. Fitch removed the rating from watch after the downgrade but assigned a negative outlook, signaling further action could be coming that would strip Southeast of its investment-grade rating.

The bonds are secured by a pledge of the unrestricted receivables of Southeast Missouri Hospital Association, with additional security provided by a debt service reserve fund.

The downgrade "reflects significant and unexpected operating losses in 2013, which resulted primarily from billing and revenue cycle issues," Fitch wrote. "SEHO lost over $39 million from operations and significantly reduced its unrestricted liquidity to $53.4 million."

Following a delayed release of its audit, SEHO disclosed covenant violations for the year ended Dec. 31 2013 triggered by its failure to meet a 1.25x debt service coverage ratio or minimum 60 days cash on hand covenant. SEHO received a waiver from Region Bank for the covenant violations under the series 2013 loan agreements as well as the late audit disclosure.

Southeast is hoping for a turnaround with measures generating one-time savings of nearly $10 million and has identified approximately $30 million in annual net operating improvements for fiscal 2014 and beyond. Management also plans to continue with a regional growth strategy, Fitch said.

Southeast Health operates a 230-bed acute care hospital, three regional acute care facilities with a total of 94 beds, and other facilities across southeast Missouri. It generated $309 million of revenues in fiscal 2013.

The report was published Sept. 12.

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