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03 Apr 2017
New York, April 03, 2017 -- Summary Rating Rationale
Moody's Investors Service downgrades East Texas Medical Center Regional Healthcare System's (ETMC) debt rating to B3 from Ba1. The action affects $280 million of outstanding rated revenue bonds issued by Tyler Health Facilities Development Corporation and Wood County Central Hospital District. The rating outlook remains negative.
The downgrade to B3 reflects the significant variance to budget through the first quarter of FY 2017 and the rapid, unexpected decline in liquidity. Weakened system performance is driven by declining volumes, a recent change in the highly competitive Tyler market following the acquisition of the competing system by a much larger entity, continued pressures on the rural hospitals, and high expense base given the system's large physician employment division. At the current run rate, and without the benefit of any asset sales, we expect ETMC will fall below its required debt service covenant of 1.0 times measured at fiscal year end (October 31, 2017), causing an Event of Default to be declared on February 28, 2018 which is the required reporting date to the bond trustee. Following the declaration of an Event of Default by the Trustee, bondholders have the right to accelerate without any grace or cure period afforded to ETMC.
ETMC continues to make its debt service payments on its all-fixed rate bonds in full and on time. Balancing the increased risk of the probability of default and debt acceleration is the system's adequate cash position and fully funded debt service reserve fund such that if a payment default were to occur, recovery would be high with favorable security lien on the bonded debt. Likewise, the Tyler flagship is a sizable and essential provider of numerous tertiary services in a large and growing service area.
The negative outlook represents Moody's anticipated deterioration in financial performance that will outpace any enacted expense strategies over the near term, resulting in an elevated risk of a covenant breach and debt acceleration in early 2018 as the headroom to the covenant rapidly narrows. Further decline in performance or liquidity beyond current expectations, or a filing for reorganization or credit relief would result in downgrade pressure.
Factors that Could Lead to an Upgrade
Given the severity of current circumstances, an upgrade is not likely in the near term. Over the longer term, an upgrade could result from consistent and sustainable improvement in operating and liquidity metrics
A revision to a stable outlook could result from stabilization of operating performance resulting in increased headroom to financial covenants
Factors that Could Lead to a Downgrade
Breach of a financial covenant and acceleration of debt
Further deterioration of operating performance or liquidity beyond FY 2017 projections
A corporate reorganization or bankruptcy filing
The obligated group is comprised of the parent corporation; unrestricted cash and investments are held at the parent. All affiliate hospitals have executed a security interest of their revenues and receipts to the corporate parent in favor of the master trustee for the benefit of all bondholders. Each restricted affiliate signed an Undertaking Agreement which obligates each affiliate to make contributions to the extent necessary for due and punctual payments of principal and interest for all outstanding bonded debt. The restricted affiliates must adhere to all covenants in the master trust indenture. A mortgage via a deed of trust is also pledged on the Tyler, Athens, Jacksonville, and Quitman facilities.
Use of Proceeds
East Texas Medical Center Regional Healthcare System is a system of primary, secondary and tertiary healthcare facilities and services located across the east Texas region. The multi-hospital system currently operates in nine east Texas counties with the flagship hospital located in Tyler.
The principal methodology used in this rating was Not-For-Profit Healthcare Rating Methodology published in November 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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