Published: July 19, 2010
Fitch Downgrades Beebe Medical Center's (DE) Bonds to 'BBB'; Maintains Rating Watch Negative
NEW YORK - (BUSINESS WIRE) - Fitch Ratings has downgraded to 'BBB' from 'A-' and maintains on Rating
Watch Negative its rating on the following series of bonds issued by the
Delaware Health Facilities Finance Agency on behalf of Beebe Medical
Center (Beebe):
--Approximately $21 million Delaware Health Facilities Financing
Authority series 2004A;
--Approximately $21.4 million Delaware Health Facilities Financing
Authority series 2005A.
RATIONALE:
--Beebe's liquidity, historically a strength, deteriorated as internal
funds were used to pay off the series 2005B bonds, terminate a swap and
set aside collateral for the series 2002 causing a reduction in days
cash on hand through the 11-month interim period ended May 31, 2010 to
81 days from 153.3 days, cushion ratio to 7.6 times (x) from 14.2x and
cash to debt to 77.8% from 112.3% as compared to the prior year end.
--Despite the negative publicity surrounding the arrest of the former
member of Beebe's medical staff for sexual abuse, volumes continue to be
solid and management reports continued strong support from the local
community, for which the hospital serves as the sole provider of acute
care services.
--Beebe's debt load is manageable with MADS representing a light 2.6% of
revenues after the redemption of the series 2005B bonds and coverage of
MADS of 4.3x compares favorably to the 'BBB' category median of 2.5x.
--Management and board are working closely with other affected parties
towards a global solution for means to compensate the many potential
victims.
--The maintenance of the Rating Watch Negative reflects the considerable
uncertainty of the resolution of the litigation involving Beebe. The
timing, magnitude and mechanism of such resolution or settlement may
result in additional negative rating changes of several notches. Given
the recent reduction in liquidity, positive rating pressure is not
likely regardless of the outcome of the pending litigation.
KEY RATING DRIVERS:
--Ability to continue to generate sufficient volumes to maintain
profitability and to meet the 60- and 100-day cash on hand covenants
required by Beebe's bond and letter of credit documents.
--A potential large negative judgment against Beebe would have a
material negative effect on the rating.
CREDIT SUMMARY:
On April 14, 2010, Fitch put Beebe on Rating Watch Negative following
published reports of the arrest and indictment of a former staff
pediatrician for rape, sexual exploitation and numerous other charges.
Since then the hospital has been named as a codefendant in a number of
civil suit actions and one class action, the outcome of which cannot be
determined at the present time. A stay of proceeding has been imposed in
the civil actions pending the outcome of the physician's criminal trial.
However, Beebe's counsel believes that in the absence of a global
settlement with all named defendants, a plaintiff's judgment against
Beebe could be material.
In order to cure a technical default resulting from rating agencies'
downgrades of the variable-rate series 2005B bonds and the variable-rate
series 2002 bonds (2002 series is not rated by Fitch), Beebe redeemed
the series 2005B bonds effective May 21, 2010, and renegotiated the
letter of credit (LOC) terms with PNC Bank, providing the liquidity
support for the 2002 series. As part of the agreement with PNC, Beebe
has fully collateralized the series 2002 series by placing funds in a
separate, restricted fund.
The Fitch downgrade reflects the deterioration in Beebe's liquidity
following the use of $18.1 million of internal funds to redeem the
series 2005B bonds, the termination of a 2007 swap resulting in a $5
million payment to the counterparty and the placement of approximately
$19.3 million in a restricted fund held as collateral against the PNC
LOC for the series 2002 bonds. As a result, Beebe's liquidity was
negatively impacted, with unrestricted cash and investments at May 31,
2010 reduced to $46.4 million from $87.2 million at fiscal year ended
June 30, 2009. The reduced cash level translates into 81 days cash on
hand and cushion ratio of 7.6%, both of which fall somewhat short of the
'BBB' category medians of 114 days and 8.1%, respectively. Cash to debt,
equal to 77.8% at May 31, 2010, was somewhat higher than the 'BBB'
category median of 62.6%, however, and Beebe's cash to debt would be in
excess of 100% if the series 2002 collateral were included in the
calculation. Coverage of MADS by operating EBITDA through the 11-month
interim period was reported at 3.2x, which is at the higher end of the
category median, and Beebe's debt burden is relatively light with MADS
representing a manageable 2.6% of revenues, as compared to the 3.5% for
the 'BBB' category median.
Volumes through the interim period have been stable, with discharges
only 1.1% below the same period last year, as Beebe shifted a number of
admits to observation status, which registered an 8.3% increase.
Operating income for the hospital only through the 11-month interim
period (Fitch historically reports on the consolidated system, which in
addition to the hospital includes the Beebe Medical Foundation and the
Beebe Physician Network, and for which reports are only prepared on a
quarterly basis) was reported at $7.7 million, equal to an operating
margin of 3.5%, ahead of the budgeted 6.2 million. Beebe's excess
income, which reflected the $6.2 million loss from Beebe Physician
Network in non-operating income, was $6.5 million, exceeding budget by
$4 million, due to robust investment earnings.
Fitch will continue to monitor the progress of the legal actions and the
ongoing investigation and adjust the rating as warranted. For more
information on Beebe Medical Center, see Fitch research dated April 14,
2010 and Jan. 27, 2009, available on Fitch's website at www.fitchratings.com.
Applicable criteria also available on Fitch's website include:
--'Nonprofit Hospitals and Health Systems Rating Criteria' (Dec. 29,
2009);
--'Revenue-Supported Rating Criteria' (Dec. 29, 2009).
Additional information is available at www.fitchratings.com.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE.
Fitch Ratings, New York
Jeff Schaub, +1-212-908-0680
Eva
Thein, +1-212-908-0674
Media Relations:
Cindy Stoller,
+1-212-908-0526
cindy.stoller@fitchratings.com
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