Moody's Investors Service has downgraded Erlanger Health System's fixed rate revenue bonds to Baa3 from Baa2. The rating action affects approximately $150 million in rated debt. The outlook is stable at the lower rating, an analyst said.
Erlanger in January reported a total net loss from operations at the end of the second quarter of $5.4 million, compared to a budgeted net loss of $798,067 and prior year income of $1.35 million.
Total net loss for the quarter was $6.8 million compared to a $2.8 million budgeted net loss and prior year net loss of $1.09 million.
Moody's said, "The downgrade to Baa3 reflects Erlanger's wide and unexpected variance to budget after recent years of significant enterprise growth, expansion of complex services and various strategies to increase market capture. Recent moderation in revenue growth, following the departure of key physicians, and expense challenges will create greater hurdles to reaching fiscal 2020 targets.
"Under the direction of new CEO leadership, management will focus on turnaround strategies, with liquidity improvement by fiscal year end 2020 a key priority. These challenges will be partially offset by Erlanger's conservative debt structure of a relatively low debt burden, recent completion of several large capital projects and market leadership in a growing economy. Erlanger will continue to serve as the region's safety net provider with a wide breadth of tertiary and quaternary services, although the presence from national for-profit and not-for-profit providers, some of which provide tertiary services, will remain a challenge.
"The stable outlook reflects very recent performance which shows some traction toward financial improvement and management's keen articulation of a multi-faceted plan that should enable the system to report better financial performance during fiscal 2020 and into 2021."
Moody's listed:
FACTORS THAT COULD LEAD TO AN UPGRADE
- Durable improvement in financial performance and liquidity metrics
- Maintenance of leading market share position
FACTORS THAT COULD LEAD TO A DOWNGRADE
- Continuation of wide variance to budget driven by declining volumes or inability to right-size the expense structure
- Inability to sustainably improve relative liquidity
- Loss in market share and volume growth to competition
LEGAL SECURITY
Bonds are secured by a gross revenue pledge of the obligated group. The sole financial covenant is a 1.10 times debt service coverage requirement measured annually.
PROFILE
The Chattanooga-Hamilton County Hospital Authority (dba Erlanger Health System) owns and operates, either directly or through leases or other arrangements, the land, buildings and equipment used in the operation of the general acute care hospitals and other facilities located in Chattanooga, Tennessee, and neighboring areas. Erlanger Health System is a 930-licensed bed system comprised of Baroness Erlanger Hospital, Children's Hospital, Erlanger East Hospital, Erlanger North Hospital, Erlanger Bledsoe Hospital and Erlanger Western Carolina Hospital. The system offers a wide array of tertiary and quaternary services.
METHODOLOGY
The principal methodology used in this rating was Not-For-Profit Healthcare published in December 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating.