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Rating Action:

Moody's downgrades East Jefferson General Hospital's (LA) bond rating to Baa3 from Baa2; Outlook remains stable

Global Credit Research - 15 Mar 2013

Downgrade affects $170 million of rated debt outstanding

New York, March 15, 2013 -- Moody's Investors Service has downgraded East Jefferson General Hospital's (EJGH) bond rating to Baa3 from Baa2 on $170 million of outstanding bonds issued by the Jefferson Parish Hospital Service District No. 2. The outlook remains stable.

SUMMARY RATING RATIONALE

The rating downgrade to Baa3 from Baa2 reflects EJGH's variable financial performance over the last several years and a downturn in performance in fiscal year (FY) 2012 failing to reach projections and leading to a decline in debt coverage levels. The downgrade also reflects a multi-year trend of declines in absolute unrestricted cash and investments. The stable outlook at the lower rating level reflects EJGH's size and position as a parish owned hospital with leading market share in the primary service area and continued implementation of a turnaround plan should help stabilize financial performance.

CHALLENGES

*Decline in financial performance in FY 2012 with an operating margin of -3.8% and operating cash flow of 5.8% is unfavorable to budget and to FY 2011 when the system recorded a break even operating margin of -0.5% and operating cash flow margin of 7.7%

*Two year decline in inpatient admissions and outpatient surgery in FY 2011 and 2012 compared to the prior years; 10.3% decline in surgical volumes in 2012 following a 7.4% decline in 2011 mainly due to a physician owned surgical hospital located two miles from the EJGH campus that opened in 2011

*Heavy reliance on Medicare representing 59.5% of gross patient revenues, one of the highest in Moody's portfolio, placing pressure on revenue growth with expected stagnant or negative rate increases from Medicare in the future

*Year over year decline in absolute cash and investments with a balance of $135 million at fiscal year end (FYE) 2012 down from $160 million at FYE 2011 and $197 million at FYE 2007

*Competitive pressure on the East Bank of Jefferson Parish and in the Greater New Orleans' metro area from a number of for-profit and non-profit providers including Ochsner Medical Center, Ochsner Baptist, and Ochsner Kenner (all part of Baa1 rated Ochsner Clinic Foundation)

STRENGTHS

*Leading market position with 39% market share in the primary service area (PSA) defined as the East Bank of Jefferson Parish (Aa2 general obligation rating), part of greater metropolitan New Orleans; one of three hospitals that remained open during Hurricane Katrina in 2005

*Moderate sized parish-owned hospital with $370 million revenue base and just under 20,000 annual admissions offering an array of services including open heart and robotic surgery (Medicare Case Mix Index (CMI) of 1.61 in FY 2012)

*Performance improvement initiatives implemented by management and recently hired consultants is expected to result in $5.4 million in productivity improvements annually; additionally upper payment limit (UPL) program funds are expected to help stabilize financial performance in FY 2013; search for a larger partner to gain further efficiencies and economies of scale is progressing

*Conservative investment strategy and despite the declines cash on hand of 138 days at December 31, 2012 remains above Baa3 median of 127 days; all fixed-rate debt structure and no interest rate derivatives

OUTLOOK

The stable outlook at the lower rating reflects the good liquidity balance, despite the declines, and the expectation that financial performance in FY 2013 will be adequate at the Baa3 rating level with cost saving initiatives and the continuation of UPL monies. The leverage position remains a concern, however is adequate for the Baa3 rating level.

WHAT COULD MAKE THE RATING GO UP

Improved and sustained operating performance and growth in volumes leading to revenue growth; strengthening of debt measures and growth in absolute cash and investments

WHAT COULD MAKE THE RATING GO DOWN

Continued decline in volumes and operating performance, leading to further decline in absolute cash and investments, and unfavorable debt measures; additional debt without commensurate increase in cash flow

RATING METHODOLOGY

The principal methodology used in this rating was Not-For-Profit Healthcare Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jennifer Ewing
Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Sarah A. Vennekotter
Asst Vice President - Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades East Jefferson General Hospital's (LA) bond rating to Baa3 from Baa2; Outlook remains stable
No Related Data.

 

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