Moody’s Investors Service on Monday downgraded to B3 from Ba3 the long-term rating assigned to Weirton Medical Center in West Virginia.
The drop further below investment grade affects $20.3 million of outstanding bonds issued by the Weirton Municipal Hospital Building Commission. The outlook is negative.
About $13 million of the outstanding debt is in 2001B variable-rate demand bonds that are jointly supported by Weirton Medical Center and secured by a letter of credit from PNC Bank.
Moody’s said its enhanced rating on the 2001B bonds is Aa3/VMIG-1, with a negative outlook.
The rating downgrade to B3 from Ba3 is attributed to a very large operating loss and a cash-flow deficit through seven months of fiscal 2012, driven by a methodology change in its accounting for contractual reserves, revenue-cycle impairment, and continued outpatient volume declines, according to a report by analyst Carrie Sheffield.
The negative outlook reflects the expectation that operating losses will continue, as well as the uncertainty of Weirton’s ability to quickly turn around operations and sustain improved performance, said Sheffield. She noted that the hospital has a “challenging payer mix,” competitive environment and weak service-area demographics.
Weirton “maintains very thin headroom” under covenants for its letter of credit and discussions are under way to request a waiver for violation of the debt-service coverage ratio, according to the analyst.
In the first seven months of fiscal 2012, Weirton showed “significant deterioration” with an operating loss of $10.5 million, or a negative 22.5% operating margin, Sheffield said.
That followed a loss of $2.5 million in 2011.
The decline in operations was attributed to an increase in contractual reserves, a decline in outpatient imaging volume, and impaired payment and collection procedures.
“Management has outlined a turnaround plan that addresses each of these issues,” Sheffield said.
The hospital also has experienced a turnover in key management positions, including three chief financial officers in the last two years.
As of Jan. 31, unrestricted cash and investments increased slightly to $38.7 million due to an increased draw on a line of credit, resulting in a favorable 147 days or 167% cash-to-debt at the end of fiscal 2011.
The hospital has a debt service reserve of about $1.6 million.
The 238-bed acute-care hospital, 35 miles west of Pittsburgh, has struggled for some time due to fewer patients and inpatient services.
Fitch Ratings affirmed its BB rating on Weirton’s 2001A bonds last July. The agency also revised the outlook to stable from negative.
Fitch does not rate the hospital’s 2001A or 2005A bonds.