Joseph Krist

Publisher

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NEGATIVE RURAL HOSPITAL TREND CONTINUES

There continue to be signs that the single facility rural community hospital facility remains under significant pressure. The latest example shows that even a facility that is larger than what is typical still faces the same pressure. Yakima Valley Memorial Hospital does business as Virginia Mason Memorial. It is a 226 staffed bed community hospital located in Yakima, WA. It saw 11,751 admissions in the last year.

The hospital, like so many others in the rural space, makes a significant economic contribution employing 2,800 and generating annual revenues of $433,163,870. But it still operates as a single site rural provider. So while revenue growth was solid, expense growth still exceeded revenues and the operating margin was still negative 0.9%.

It is not a surprise that these numbers impacted the hospital’s rating. The hospital issues debt secured by a receivables pledge and a lien on the primary hospital campus. There is also a debt service reserve fund. Key financial covenants include minimum days cash on hand of 40 days, and debt service coverage of 1.2x. This should all provide for coverage of debt service but it’s the trend which concerns.

So Moody’s downgraded Yakima Valley Memorial Hospital’s  revenue bond rating to Ba1 from Baa3. This reflected expectation of continued weak performance in fiscal 2019 following a miss to budget in fiscal 2018. Importantly, the outlook remains negative for the rating even after this downgrade. The negative outlook reflects an expectation of still modest margins in fiscal 2019, despite expectations of improvement, reflecting continued cost and market challenges.

So in a nutshell, there you have the rural hospital sector.

PUERTO RICO

The latest turn of events in Puerto Rico’s ongoing effort to restructure its debt is the decision by the judge overseeing the Commonwealth’s Title III proceedings to grant an urgent motion establishing procedures to handle a request by the island’s Financial Oversight and Management Board to dismiss $6 billion in general obligation (GO) debt issued by the commonwealth after 2012. This will include a “two-stage procedure” that will ensure disagreements over the proposals are worked out. Judge Swain said the “best thing for me to do” was to ask the objectors and respondents to have a “meet and confer” that would result in a revised procedural order.

If the definition of justice is a result which leaves both parties disappointed, then this fits the bill. Bondholders said the procedures did not provide adequate notice to creditors and potential objectors, and granted the government substantive advantages that were not provided to the holders of the challenged GO bonds. Bondholders say that the proposed procedures force creditors to file joint responses, compromising their ability to present their arguments adequately; treats creditors differently according to the amount of their claim; and prematurely forces creditors to answer discovery requests.

The judge takes the position that case management orders call for all bondholders to receive notices and answers were needed regarding whether anyone was at risk of a default judgment and what would happen to those creditors who do not answer notices of the proposed repeal of $6 billion in debt. The judge asked for improvements to the language of the notices and for assurances that all bondholders, large and small, be informed. She also cited the fact that creditors could seek the committee by petitioning the United States Trustee. The U.S. Trustee is part of the U.S. Department of Justice and is responsible for overseeing the administration of bankruptcy cases.

GO bondholder representatives expressed a view that parties should have 60 days to announce if they will participate in the process. Attorneys for the fiscal board’s Special Claims Committee are not supportive of smaller holders receiving any more protection basing that position on its perception that most of the creditors that purchased the challenged bonds were not retail bondholders, as they were sold in increments of $150,000.

Experienced high yield investors know that initial denominations do not prevent bonds from winding up in “small bondholder” hands, so we take that argument with a grain of salt. Once again, the small bondholder finds themselves in a disadvantaged position. It shouldn’t be that way. As the Special Claims Committee representative said about another aspect of this case – “It does not have to be that complicated.” 

While these events unfolded, the executive director of the Puerto Rico Fiscal Agency and Financial Advisory Authority and the Puerto Rico Sales Tax Financing Corp. (Cofina) announced that the U.S. District Court approved the “Third Amended Title III Plan of Adjustment” between Cofina bondholders and monoline insurers. The Plan of adjustment is the first under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) and follows the recent restructuring of the Government Development Bank for Puerto Rico under the law’s Title VI.

SANTEE COOPER IN PLAY?

The State of South Carolina has received four legitimate offers to buy all of Santee Cooper and pay off the state-owned utility’s $8 billion in debt according to Virginia-based ICF, a consultant advising on a possible sale of the municipal utility. ICF was hired by a special committee of lawmakers and the governor. ICF estimates the sale of Santee Cooper would leave its customers paying less for the V.C. Summer debacle than customers of SCE&G, the majority partner in the failed $9 billion project. SCE&G customers collectively must pay an additional $2.3 billion for two unfinished reactors over the next 20 years even though the utility was bought by Virginia-based Dominion Energy earlier this year.

It is estimated that customers that Santee Cooper directly serves will be forced to pay roughly $6,200 more per household in higher rates for the unfinished reactors over the next four decades. Customers of the 20 co-ops who buy power from Santee Cooper contractually are obligated to pay about $4,200 per household for the failed project.

Seventeen parties expressed interest in Santee Cooper at one point but,  only 10 submitted preliminary bids. Companies that privately have shown interest in Santee Cooper include Florida-based NextEra Energy, Charlotte-based Duke Energy, Virginia-based Dominion Energy, Greenville-based Pacolet Milliken Enterprises, Atlanta-based Southern Co., New York-based LS Power and South Carolina’s 20 electric co-ops – who together buy three-fifths of Santee Cooper’s electricity. Dominion said it is interested in managing Santee Cooper – but not buying it.

The report begins a process of evaluation of proposals by the State legislature. The likely timeline for the process would not likely provide for a resolution before the fall. The outcome is far from a slam dunk as there are many perspectives being brought to the debate. They include issues of public versus private ownership, the jobs of current Santee Cooper employees. Skepticism is seen as being a bigger issue in the State Senate where members have been skeptical that a for-profit company can buy Santee Cooper, pay off its more than $8 billion in total debt, and still charge lower electric rates than the not-for-profit state agency.

A more subtle issue would be the long term status of Santee Cooper’s coal fired generation assets. The report acknowledges that any buyer could find cost savings by investing in more natural gas generation and moving away from Santee Cooper’s coal-fired power plants. Those decisions will have real implications for the locations of those facilities.

Ultimately, the coop customers probably hold the hammer in the resolution of the situation. The co-ops could opt out of their long-term contract to buy power from Santee Cooper if they don’t like the buyer, taking 60% of the utility’s business with them. But the co-ops have said they favor a sale or transformation of Santee Cooper that would lower their customers’ power bills.

NEWARK UPGRADE

Moody’s Investors Service has assigned a Baa2 underlying rating  and upgraded the city’s outstanding GOULT, GOLT, GOULT & GOLT-backed non-contingent lease debt, and GOLT-backed custodial receipt debt to Baa2 from Baa3. The upgrade was attributed to “the city’s weak, albeit improved, fund balance and cash position, a sizeable and diverse tax base, and an elevated debt and pension burden. The rating also incorporates the city’s weak resident wealth and income levels, elevated poverty, and recent tax base growth.”

The outlook on the underlying rating remains positive. The outlook relies on the premise that the recent positive trend of financial operations will continue, leading to a strengthened reserve and liquidity position. The outlook also incorporates expectations that ongoing redevelopment will lead to material tax base expansion. It is important to note that Newark is the county seat for Essex County (Aaa) and New Jersey’s most populous city. It has a population of approximately 285,000 and is a major regional economic center and transportation hub.

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