Moody's downgrades Southern Regional's bond rating

By Joel Hall


After months of close observation, Moody's Investors Service chose this week to downgrade Southern Regional Health System's bond rating from Baa2 to Baa3.

While the health system, which operates Southern Regional Medical Center, has continued to generate some profit, the financial research firm has noted a continual decline in its liquidity.

Moody's announced the downgrade, as well as a negative outlook for the health system's bond rating, on Monday. According to Mark Pascaris, an analyst for Moody's, the decision reflects the system's, "material operating struggles through ten months [of] fiscal year 2009."

According to Moody's, Southern Regional held a 1.1 percent operating cash flow margin in the last 10 months of fiscal year 2009. Pascaris said that while the hospital has maintained "modest operating performance since FY 2007," its cash-on-hand decreased from 80 days of cash to 52 days of cash between the end of fiscal year 2008 and April 30 of this year.

The Moody's decision affects $13.3 million of outstanding debt, according to the report.

Charles Hayslett, a spokesperson for the hospital, said Tuesday, "we are aware that Moody's was evaluating us and we aren't surprised by the decision."

The report by Moody's said that weak operating performance during FY 2009 was due to a number of factors, including:

· A 10 percent decrease in newborn admissions and other women's services, due partly to competition from Piedmont Fayette Hospital's obstetrics unit, built in 2006.

· A 0.8 percent decrease in the number of surgeries.

· The recent implementation of a picture-archiving and communication system, which resulted in a jump in information systems and maintenance costs.

· And $3 million of restructuring costs, which include severance expenses related to the departure of most of the hospital's management, and costs associated with installing FTI Healthcare, a turnaround consultant which took over the hospital's senior management in December of last year.

Ron Dodson, chairman of the hospital's board of directors, said while the downgrade may affect the hospital's ability to enter the bond market, it will be a while before the hospital takes on any new debt. Late last year, Clayton County agreed to use its higher bond rating to help the hospital refinance $40.2 million in bonds.

Dodson said the downgrade of the hospital's bond rating is "typical of the health care industry right now," but believes the hospital is "in the process of a turnaround."

"There was a notice put out [by Moody's] that said many hospitals would be downgraded," Dodson said. "[The rating is] not bad. With FTI [Healthcare] being there, we have made great progress.

"For the first time since I have been on the board, the length of stay has been below budget for the last couple of months," he continued. "They have cut out a lot of contract help ... that costs about three times as much as a regular employee. They have cut back drastically and that has helped a lot.

"We're going to have to get our finances into a little better shape," before the hospital can enter the bond market, Dodson said.