CHICAGO -Standard & Poor's Friday downgraded to B-plus the already below-investment-grade Ohio-based Forum Health in a two-notch cut that analysts said reflects the system's ongoing fiscal difficulties as well as a few new challenges.
The action affects $178 million in debt issued through Mahoning County, Ohio. The debt is secured by gross revenues and mortgages on its primary buildings.
The rating agency lowered its rating to B-plus from BB - a year after dropping it two notches to BB from the lowest investment-grade credit of BBB-minus - as the Youngstown system enters its third year of a turnaround plan aimed at improving operations. As part of that plan, Forum installed all-new management in the last year and saw its operating margins grow in fiscal 2007.
But rating analysts questioned the stability of the turnaround plan and noted that margins have declined again for the first four months of 2008.
"They've had several challenges over the past several years, and now they have a few new issues they have to overcome," said Standard & Poor's analyst Antionette Maxwell. "Also, we're very uncertain about the stability of maintenance of their turnaround plan."
Forum, which was formed in 1997, operates Western Reserve Care System in Youngstown and Trumbull Memorial Hospital in Warren, Ohio. It operates a number of other facilities, including long-term care and rehabilitation facilities.
Over the last few years the system has been in talks with at least two providers, including Community Health Services and Catholic Healthcare Partners, to sell some of its assets. Although those deals reportedly fell through, Forum is still looking to sell off several of its assets to lighten the burden on its balance sheet.
Chief among Forum's problems are tough negotiations with its unions, which represent 75% of its workforce. Late last year, Forum completed prolonged negotiations with its nurses' union to sign a short-term contract that expires in July. It also signed contracts with the American Federation of State, County and Municipal Employees, its primary union at its Trumbull Memorial Hospital, as well as Service Employees International Union, which represents the union's service workers.
Those contracts prompted Moody's Investors Service to take the system off its watch list for a possible downgrade and revise its outlook to positive from negative. Moody's rates Forum B1.
That success was not enough to stall the Standard & Poor's downgrade. "They still have union negotiations to complete, and it's really an uphill battle for them," Maxwell said. "We feel it's very important to their viability and stability going forward."
During fiscal 2007, Forum was required to fund a debt service reserve account, which totaled about $13.5 million in 2007 and 2006, due to technical covenant violations with its credit providers Fifth Third Bank and JPMorgan Chase, as well as an amendment to the master forbearance agreement.
Newer challenges facing the system include declining volume, stemming in part from the recent departure of several physicians at its Northside Medical Center hospital, as well as the increased competition from a new hospital in the Warren market.
"Given these hurdles, we view this as a critical time for Forum's financial profile, and the stabilization of the organization will more than likely be realized in the distant future; therefore, there is potential for a lower rating," Maxwell wrote in a release accompanying the downgrade.
As part of its improved operations, the system reported a cash flow of $30 million for the first seven months of 2007, exceeding cash flow for all of 2006.
Fitch Ratings does not rate the system.