Ector County Hospital District recently had their bonds downgraded by Fitch Ratings and received an Issuer Default Rating.
ECHD’s rating was downgraded from BBB to BB+, with an Issuer Default Rating, and Fitch revised the rating outlook from negative to stable, a Fitch Ratings press release stated.
The district has $44.65 million hospital revenue refunding bonds from a 2010 bond series for the MCH Center for Women and Infants, 500 W. Fourth St., and MCH Center for Health and Wellness, 8050 E. Highway 191.
Medical Center Health System CFO Robert Abernethy said the downgrade is reflective of the hospital district’s EBIDA earnings during the last two years. A Fiscal Year 2017 audit presented by BKD earlier this month showed the district reported operating losses of about $77 million in 2017 and a loss of about $59 million in 2016.
“I think this downgrade was not that unexpected, but I was pleased that it went only to a BB+. I think it reflects not only do we have a lot of room for improvement, but it also reflects the optimism that we’re going in the right direction,” Abernethy said.
Although the district received an Issuer Default Rating, Abernethy said ECHD is not in technical default, as they are well within their debt service coverage ratio covenant.
While ECHD’s bond rating remained at A- in 2016, their rating outlook changed from positive to stable. A Fitch Ratings press release stated the change was due to MCH’s lower operating profitability and increased debt burden. MCH had start-up costs related to the opening of two new primary care centers in 2015, expenses related to physician recruitment and experienced a decline in sales tax revenue due to the weakening local economy at the time, which all effected the rating outlook change.
The hospital district later closed one primary care center on Golder Avenue due to the operational loss it was experiencing.
In 2017, the district was downgraded from A- to BBB, a two-step downgrade, and went from a rating outlook of stable to negative.
Abernethy said he believes the downgrades over the past two years were largely due to a downturn in the local economy and the Cerner conversion.
“Sales tax was reduced over $1 million a month. That was about $12 to $14 million negative in 2016,” Abernethy said. “The issues we’ve had with the Cerner conversion, that has really hurt us from an Accounts Receivable standpoint.”
Last year, former CFO Jon Riggs attributed the downgrade in 2017 to the district spending a good chunk of their cash reserve to implement the new electronic medical record system, which had to be purchased since their old system was expected to sunset in March. The new system cost about $55 million.
Abernethy said about $8.8 million of bank notes is what remains of the five-year note on the Cerner system, which will mature by 2020.
Due to the downgrade in 2017, and facing the possibility of technical default, the district was required to pay for an outside company to review the hospital’s operations and offer opportunities for improvement in certain areas. Several ECHD board members said administration at the time was slow to implement those changes when they received the report due to former President and CEO Bill Webster announcing his retirement. Riggs resigned a month before Webster’s retirement in January.
Abernethy was hired on as the interim CFO before becoming full-time when the district hired new President and CEO Rick Napper. Fitch Ratings noted that they expect the hospital district to improve profitability and operating margins with the hospital under new leadership, and with the return of Abernethy, which changed the hospital’s outlook rating from negative to stable this year, the release stated.
Abernethy said the rating outlook also was a reflection of the strong economy in the Permian Basin and particularly in Ector County.
The CFO reported they are tackling their Accounts Receivable backlog, their coding backlog is down to the lowest it’s been since April a year ago as of last week and through February they are reporting a positive EBIDA of about $2.7 million.
“We’re heading in the right direction toward the goal of maintaining a — getting to about a $5 million EBIDA for 2018 and we’re gonna need that to stay in compliance with our bond covenants as far as the debt service coverage ratio is concerned,” Abernethy said.
The district’s goal, Abernethy said, is to get back into the high BBBs if not an A- rating, which is where they were at when Abernethy retired.