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Fitch Affirms St. Joseph Health Services of Rhode Island Revs at 'CCC'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'CCC' rating on the $17.1 million series 1999 bonds issued by the Rhode Island Health and Educational Building Corporation, on behalf of St. Joseph Health Services of Rhode Island (SJHS).

SECURITY

The bonds are secured by a pledge of SJHS gross receipts, real estate, and debt service reserve fund.

KEY RATING DRIVERS

WEAK FINANCIAL PROFILE: SJHS's financial profile is characterized by continued operating losses, extremely low liquidity, and inadequate debt service coverage. However, debt service payments continue to be paid on time.

POOR UTILIZATION TRENDS: Through July 31, 2012 (10-month interim; unaudited), SJHS's inpatient admissions continued to decline, totaling 4,430, which is down from 4,832 in the prior year. Further, inpatient surgeries and emergency department visits continued to drop from prior year levels.

WEAK SERVICE AREA CHARACTERISTICS: Located in North Providence, Rhode Island, SJHS' service area is challenged by high unemployment, stagnant population growth, and below-average wealth indicators.

LIGHT DEBT BURDEN: SJHS has a relatively light debt burden as maximum annual debt service (MADS; $2.6 million) represented 1.7% of total annualized revenues through the July interim period.

STRATEGIC PARTNERSHIP: SJHS and CharterCARE Health Partners affiliates (CharterCARE) are in the process of selecting and forming a strategic partnership. Fitch expects CharterCARE to recommend a partner to its board for affiliation over the next several weeks. Once finalized, Fitch will review the affiliation's credit impact on SJHS.

CREDIT PROFILE

The rating affirmation at 'CCC' reflects SJHS's weak financial position, declining utilization trends, and unfavorable service area characteristics. Ten months through fiscal 2012 (unaudited), SJHS recorded a $5.1 million loss from operations, which translated into a negative 4.0% operating margin and 0.5% operating EBITDA margin. Although improved from fiscal 2011's negative 7.5% operating margin and negative 2.9% operating EBITDA margins, SJHS's profitability metrics still compare negatively against Fitch's 'Below Investment Grade' medians of 1.7% and 3.8%, respectively.

Through the same period, SJHS had very low liquidity as measured by 10 days cash on hand (DCOH), a 1.5x cushion ratio, and 22% cash to debt. Fitch views SJHS's liquidity as extremely low, leaving the organization with no financial cushion.

Using a MADS of $2.6 million, SJHS had very low MADS coverage of 0.3x through July 2012. As a result of violating the annual debt service coverage covenant in fiscal 2011, management entered into a forbearance agreement with the bond trustee on March 23, 2012 for the debt service covenant violation. Under the forbearance agreement, SJHS is required to make monthly principal and interest payments to a debt service reserve. Timely debt service payments have been made to date and a debt service reserve fund remains fully intact. Management is currently engaging FTI Consultants to make various operational improvements relating to revenue cycle, productivity, and supply chain savings.

Overall, the main driver behind SJHS's continued poor performance is the weak service area. A softened local service area economy is a drag on the organization's financial performance and management expects this trend to continue over the near term.

SJHS has a very conservative debt profile with 100% fixed-rate bonds and no outstanding swaps.

SJHS is located in Rhode Island. The organization operates a 359-bed acute care general hospital and integrated network of primary care and specialty clinics. In fiscal 2011, SJHS had $157.2 million in total revenue. SJHS covenants only to disclose annual audited financial information to EMMA.

For more information, please see Fitch's last press release 'Fitch Affirms St. Joseph Health Services of Rhode Island Revs at 'CCC',' dated April 12, 2012, and available at www.fitchratings.com.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

'Revenue-Supported Rating Criteria', June 12, 2012.

'Nonprofit Hospitals and Health Systems Rating Criteria', July 23, 2012.

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Applicable Criteria and Related Research:

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

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Fitch Ratings
Primary Analyst
Michael Burger, +1 212-908-0555
Director
Fitch Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Gary Sokolow, +1 212-908-9186
Director
or
Committee Chairperson
Emily Wong, +1 212-908-0651
Senior Director
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Email: elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings