Standard & Poor's Ratings Services said it lowered to A-plus from AA-minus its rating on North Carolina Medical Care Commission's health facilities revenue bonds, issued for the Wake Forest Baptist Obligated Group (WFB).
The outlook is stable.
"The downgrade is primarily due to WFB's weak operating performance, and our expectation that operating results won't reach prior forecasted levels in the near term," said Standard & Poor's credit analyst Liz Sweeney. "Also contributing to the rating change is a modest reduction in balance sheet strength driven by lower reserves and additional debt in fiscal 2013."
Since October 2012, when the outlook was changed to negative from stable, WFB's operating results deteriorated, in part due to the temporary business disruption and additional expenses related to WFB's electronic medical record rollout.
Other factors included a challenging research funding environment, much slower volume growth, lower provider tax revenue, and sequestration cuts.
WFB also borrowed $104 million in fiscal 2013 on a line of credit due to the slow revenue collections related to the rollout.
Residual expenses related to the IT rollout and a slower volume environment will continue to weigh on operating results, although we expect operating income to rebound to positive territory in 2014 as management's corrective actions demonstrate results and the disruptive effect of the IT rollout diminishes.
The expectation that operating results will rebound measurably in fiscal 2014 is a key reason for the stable outlook. WFB's dispute over a device license and the related royalties has not yet been resolved. WFB is currently not accruing any revenue from the license under dispute. Therefore, WFB has only upside potential for its credit in this situation. A sizable settlement or court victory could lead to a reassessment of the rating.
