LOS ANGELES— Moody’s Investors Service downgraded the issuer rating for Torrance Memorial Medical Center to A3 even as the Southern California hospital looked to complete construction on its new patient tower six months early.

The downgrade from A3 to A2 with a stable outlook affects $285 million in debt.

Moody’s analysts gave the hospital a stable outlook at the lowered rating that was partially attributed to declining patient volume in physician practices the hospital invests in, resulting in weaker margins.

The stable outlook at the lower rating level is attributable to Torrance’s fundamental strengths including good market share, and analyst’s expectation that operating performance in future years will be similar to that of other A3 rated hospitals.

The Torrance hospital’s new patient tower expected to open six months early in fall 2014, which was cited as a strength in the Moody’s report.

The accelerated construction schedule means hospital officials will have to make equity contributions earlier than planned, but also results in savings that will be used to build out planned shelled space without exceeding the original project budget, analysts said.

Other strengths include long-term contracts with two large physician groups that represent 38% of the hospital’s volume. The hospital also has 38% market share in the affluent South Bay of the Los Angeles metropolitan area and only 5.1% exposure to Medi-Cal.

Challenges cited in the report included declines in operating performance and cash flow, which dropped to a margin of 6.6% in fiscal 2013. The drop represents a three-year trend from years prior when operating cash flow margins ranged from 10% to 11%

The hospital’s defined benefit pension also was underfunded by $75 million in fiscal 2012, weakening comprehensive debt ratios.

To achieve an upgrade, the hospital would have to improve consolidated operating performance. An inability to meet budget projects for fiscal 2014 resulting in further declines in operating performance could further erode the rating.

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