Marshall Medical Center in Placerville, California had the rating on its revenue bonds downgraded to junk by Fitch Ratings.
The teaching hospital is a general medical and surgical facility 50 miles northeast of Sacramento.
The downgrade affects Series 2004B revenue bonds sold through a conduit issuer California Health Facilities Financing Authority. They were cut to BB-plus from BBB-minus.
Fitch also downgraded MMC’s long-term issuer default rating to BB-plus from BBB-minus. The rating outlook is stable.
Fitch only rates Marshall’s 2004B bonds, of which approximately $20 million outstanding. They are to be refinanced via a California Cal-Mortgage Loan Insurance Program loan, which will also include $50 million of new money for reimbursement and future capital projects.
Marshall’s total outstanding debt is $55 million as of fiscal year end 2019, according to Fitch.
A hospital spokesperson couldn't immediately be reached for comment.
Fitch revised its outlook on the healthcare sector to negative from stable in March amid the developing coronavirus situation.
The downgrade was spurred by MMC’s addition of $50 million of debt through the Cal-Mortgage loan, Fitch analysts wrote.
The bonds are secured by a gross revenue pledge and mortgage lien of the obligated group, which includes a subsidiary surgery center that is non-obligated per the master indenture. The obligated group accounted for substantially all total assets and revenue of the consolidated entity in fiscal 2019. Fitch’s analysis is based on the consolidated entity.
Roughly $27 million of the $50 million Cal-Mortgage loan will reimburse MMC for completed capital projects and the remaining will go toward funding various capital projects over the next couple of years, according to Fitch. As part of the debt issuance, Fitch said, MMC will also refinance the existing $20 million Series 2004B bonds rated by Fitch.
The addition of new debt improve the hospital's liquidity levels, but will also weaken MMC’s capital-related ratios, particularly its cash to adjusted debt, Fitch analysts wrote.
“Given Fitch's expectation of flat volumes and expense pressures anticipated over the next few years, MMC's operating risk assessment is expected to change subtly from midrange to weak,” analysts wrote. “With these factors coupled with the current economic condition and coronavirus situation, Fitch now views that MMC's credit profile could be more vulnerable to unexpected volatility in operations.”
MMC has a leading market position as the sole provider in its primary service area and leading market share presence. MMC continues to benefit from California's Hospital Quality Assurance Fee (HQAF) program given its demographics and rural designation, analysts wrote.
Analysts said Fitch’s ratings are forward-looking in nature, and Fitch will monitor developments in the sector as a result of the virus outbreak as it relates to severity and duration, and incorporate revised expectations for future performance and assessment of key risks.
