CHICAGO — Moody's Investors Service downgraded a small Ohio hospital deep into junk territory amid a liquidity crisis and after a proposed merger with the state's largest provider fell through.
Moody's downgraded East Liverpool City Hospital to Caa1 - seven notches below investment grade - from already speculative-grade B2. The outlook is negative at the lower rating.
Bankruptcy is a possibility, the ratings agency warned June 3.
"The multi-notch downgrade to Caa1 reflects the inability to complete the merger with Mercy Health, increased acceleration risk of bank-supported debt, continued material 8% liquidity decline in the first quarter 2015, and very high operating cash flow losses," Moody's analyst Kevin Connolly wrote in the report. "Estimated cash burn is $10 million annually."
The hospital is at high risk for "severe and sudden liquidity contraction because of a covenant breach under bank-related debt," said Connolly .
For credits rated from C to Caa, Moody's figures the one-year cumulative default probability at 15.6%; the three-year default probability at 35.6%, and five-year probability at 48.6%.
East Liverpool City Hospital is a small acute-care facility in rural Columbiana County on the Ohio River near Pennsylvania and West Virginia. It's part of the River Valley Health Partners system, which includes the hospital, River Valley Physicians, a therapy center and a home health services facility.
Officials did not return calls for comment.
After years of struggles, ELCH announced a merger with Mercy in late 2014, hoping to stabilize its finances by joining with Ohio's largest provider. But the deal fell through in April and ELCH is now reportedly looking for other partners.
The hospital's liquidity crisis is tied to its variable-rate debt.
The hospital has $7 million of Moody's-rated debt, and another roughly $17 million of variable-rate demand bonds issued in 2006 that are not rated by Moody's.
The variable-rate bonds are supported by a letter of credit from PNC Capital through January 2016. The hospital is currently not in compliance with the debt service coverage covenant of 1.5 times, Moody's said. That allows PNC to demand immediate acceleration of payments, although the bank has not yet done so, according to analysts.
The credit also has an interest-rate swap that hedges $10.2 million of the VRDOs. The swap's current market liability is estimated at $2.9 million.
"The negative outlook reflects the high risk of debt acceleration and likely rapid decline in liquidity as well as potential for bankruptcy filing or troubled debt restructuring," Moody's said. "Reduction of significant operating losses is challenged by high physician subsidies and the presence of unions."
The hospital has 245 days cash-on-hand but is burning through about $1 million a month with unrestricted investments of $36.5 million.
Standard & Poor's dropped the credit to BBB-plus from A-minus with a stable outlook in 2013.
