DALLAS – Already junk-rated Good Shepherd Health System, one of the largest healthcare providers in East Texas, received another downgrade.
Moody’s Investors Service dropped Good Shepherd to Caa1 from Ba3 Thursday and retained a negative outlook, citing “cash-flow losses, significant recent liquidity declines, minimal headroom under covenants resulting in high debt acceleration risk, and a large mandatory tender in a year.” The action affects $150 million in outstanding debt.
“While the system is expected to meet March covenants, the pace of liquidity decline and dependency on historically uneven Medicaid funding raise the risk of meeting the September liquidity covenant,” analyst Lisa Martin wrote.
On March 1, 2017, Good Shepherd must pay off or refinance about $88 million of two-year put bonds designed to restructure the system’s debt. The bonds were sold to JP Morgan.
Moody’s rated the 2015 put bonds at “SG,” which “reflects the high degree of risk of paying or refinancing the mandatory tender by March 1, 2017.”
The 2015 bond sale came after a $69 million sale and leaseback of the system’s nine medical office buildings in December 2014.
Since August, Good Shepherd has been looking for a merger partner to provide financial backing and greater efficiency. Another operator in the region, Lufkin’s Memorial Health System, joined forces in 2014 with Colorado’s Catholic Health, which pledged $100 million in improvements.
“We are seeking an affiliation with a partner that has a similar commitment to mission, vision, clinical outcomes and patient safety,” said Pat Florence, board chairperson for Good Shepherd.
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“From this group of three final proposals, management and board leadership have begun “reverse due diligence” of such candidates,” the notice said. “Management believes that GSHS should be in position to publicly announce its selection of a final strategic partner in the near future.”
All of the proposed partners carry high investment grade ratings and any agreement under consideration would resolve Good Shepherd’s debt crisis, the notice indicated.
“Management continues to believe that the strategic affiliation process and corresponding addressing of GSHS debt should be completed by Sept. 30, 2016,” the notice said.
Based in Longview, Texas, Good Shepherd Health System includes two medical centers, more than 30 provider office locations, emergency services, immediate care centers, a full range of outpatient services and a health and wellness facility, the Institute for Healthy Living.
Martin said that Good Shepherd’s position as the leading provider in the region makes it an attractive merger partner.
“Given the typical complexities of and possible delays completing mergers, as experienced by others in the industry, the potential transaction is not a primary rating factor at this time,” Martin wrote. “In the event the transaction fully retires, refunds or provides for a full guarantee of the system's debt, the rating would be withdrawn or reflect the guarantee.”
Like all Texas hospitals, particularly those in rural areas, Good Shepherd is facing tremendous uncertainty over the renewal of a Medicaid waiver that expires in September. If the federal government does not renew the waiver, Texas could lose its federal Medicaid funding.
Texas’ Republican leaders negotiated the waiver in 2011 to avoid accepting federal funds for expansion of Medicaid to about 1 million state residents. Republican Gov. Rick Perry refused the federal funds and then-attorney general Greg Abbott sued the federal government in an effort to overturn the Affordable Care Act known as Obamacare. Abbott, who is now governor, has said nothing about the closure and continuing threats to regional public hospitals.
Standard & Poor’s last affirmed its BB-minus rating on Good Shepherd in February.
With a metro population of about 217,000, Longview is the county seat of Gregg County. Falling oil prices have dimmed the economy after years of rapid growth.
