Sparks Hospital receives debt downgrade

Sparks Regional Medical Center has had its debt rating downgraded by Moody’s, a leading national rating agency. The rating on $55.8 million in hospital debt was lowered by Moody’s from Baa3 (Moderate credit risk, with debt considered medium-grade investment) to B2 (Subject to high credit risk, with poor credit quality) on Monday.

The report, however, did mention several positives.

“Management has implemented several operational and financial changes that are expected to improve operating income by as much as $10 million in (fiscal year) 2009,” Moody’s noted in the report.

The changes, according to Moody’s, includes the opening of an inpatient rehabilitation unit, lowering physician salaries, qualifying for a drug purchase program that will lower costs and the hospital’s plan to “curtail capital expenditures significantly” in 2009. Moody’s also listed as a strength the fact that Sparks has a fully-funded debt service reserve fund.

“Given the current unrest in the country’s economy, it didn’t surprise us in the least that this change would happen,” said Frederick “Ted” Woodrell, CEO of Sparks Regional Medical Center, in a statement to The City Wire. “It is simply Moody’s being diligent in their analysis of all bond ratings, not just Sparks.”

Woodrell cited the hospital’s sleep disorder center, inpatient rehab and “Clinical Decision Unit” as parts of a strategic plan that “should continue to pay dividends for Sparks.”

Continuing, Woodrell noted: “Moody’s even went above and beyond to call out those strengths and gave every indication that they believe that a continued positive outcome is expected based on the current direction of the Medical Center.”

Reasons cited by Moody’s in the downgrade of Sparks’ debt include:
• Significant reduction in unrestricted cash to a current balance of $9.6 million (as of Nov. 12, 2008), from a much stronger $50 million at FYE 2007. The current level of cash translates into a weak 14 days cash on hand and provides very thin 15 percent coverage of debt.

• The decline in cash is due to material operating losses in FY 2008 accompanied by high capital expenditures, and a billing system conversion that has tied
up an additional $4.2 million in accounts receivable.

• Significant and continued decline in surgical volumes during FY 2008 as competition from a physician owned ambulatory surgery center continues to take volume away from Sparks. (This note by Moody’s refers to the River Valley Musculoskeletal Center.)

The Moody’s report included a few key stats. Those include:

Fiscal year 2008 inpatient admissions: 12,776
Fiscal year 2007 inpatient admissions: 12,774

Fiscal year 2008 operating revenue: $244 million
Fiscal year 2007 operating revenue: $234 million

Fiscal year 2008 total debt outstanding: $65 million
Fiscal year 2007 total debt outstanding: $67.7 million

Days cash on hand as of June 30, 2008: 37
Days cash on hand as of June 30, 2007: 78

Moody’s said it will continue to monitor the hospital’s financial position and will have another review within 90 days.

“Our review will focus on actions management has taken in recent months to improve financial performance, cash flow, and to strengthen the balance sheet. Additionally, we believe there is a significant chance that SRMC’s cash position could decline further over the coming months,” Moody’s analysts noted in the report.