Fitch Ratings said it has downgraded to BB-plus from BBB-minus the rating on bonds issued by the Hospitals and Higher Education Facilities Authority of Philadelphia, for Temple University Health System Obligated Group, consisting of $311,105,000 series 2012A and B; and $213,293,000 series 2007 A and B.
The rating outlook is stable.
The bonds are secured by a pledge of gross revenues of the obligated group, mortgages on certain properties of the obligated group, and a debt service reserve fund. The obligated group represents approximately 94% of the assets and 99.9%% of the revenues of the consolidated system. Fitch reports on the performance of the consolidated system.
The downgrade is based on the large operating loss of $59.3 million (negative 6% operating margin) for the nine-month interim period ended March 31, 2013. The decline in operating performance is the result of a slower than anticipated ramp-up of volumes from the recruitment of physicians to Temple University Hospital (TUH) and the difficulty, over the short term, to reduce the length of stay associated with the resulting increase in acuity, lower than budgeted volumes at Jeanes Hospital and Fox Chase Cancer Center, and the cost of the professional liability program.
The system's debt coverage of maximum annual debt service (MADS) of $38.9 million by EBITDA is weak at 0.9x for the interim period, though debt load remains manageable with MADS at 3% of system revenues. Based on what is a reported breakeven performance thus far through the fourth quarter of 2013 and barring any unforeseen audit adjustments, management expects to exceed its 1.10x coverage of annual debt service (ADS) of $31.4 million for the 2013 fiscal year, ended June 30. A violation of the 1.10x rate covenant requires engagement of a consultant call-in and failure to meet 1.0x ADS coverage is an event of default.