Fitch Downgrades Deborah Heart & Lung Center (New Jersey) to 'B-'; Outlook Revised to Negative

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded to 'B-' from 'BBB' the outstanding $-22.7 million New Jersey Health Care Facilities Financing Authority's revenue bonds, Deborah Heart and Lung Center (DHLC), series 1993. The Rating Outlook is revised to Negative from Stable.

The major reasons for the downgrade include the continuing large operating losses and a further significant erosion of in DHLC's liquidity, which had historically been weak, caused by declining utilization, employee retirement funding and recent capital spending. On Sep. 30, 2009, DHLC had unrestricted cash and investments of $4.1 million, equal to 12.2 days cash relative to expenses, a decrease from $9.9 million as of Dec. 31, 2008, and an outstanding balance of $3.6 million from a draw on lines of credit. In December 2008, DHLC elected to request a $3 million advance from the State's Health Care Subsidy Fund in order to be able to pay a contractor and continues to have over 90 days in current liabilities. Additionally, the Deborah Hospital Foundation, which has guaranteed DHLC's payment of the 1993 bonds, has seen a sharp decrease in its unrestricted investments to $9 million on Sep. 30, 2009 from $33 million in 2006, both as a result of transfers to DHLC and market losses. Also of concern is the delay in the release of the audit for the fiscal year ending Dec. 31, 2008, which is required to be completed 120 days after the close of the fiscal year, but has not yet been officially released (Fitch was provided a draft of the audit). Among the reasons reported by management for the delay was a change in the Director of Finance position and an issue regarding impairment of the Center's assets in order to comply with FAS 144.

DHLC reported operating loss of $20.9 million for the fiscal year ending Dec. 31, 2008 (a negative operating margin of 16.2%) and, after a $14 million contribution from the Foundation, a bottom line loss of $15 million (a negative excess margin of 4.4%). Fitch excludes from the above calculations the impact of an $8.8 million loss on impairment of assets. Management had instituted a workforce reduction plan, including both early retirement, as well as layoffs, resulting in a reduction of 92 Full Time Equivalents (FTEs). Coverage of maximum annual debt service for fiscal 2008 was 1.49 times (x) based on the bond document calculation, which includes contributions made by the Foundation pursuant to a subsidy agreement, whereby the Foundation is obligated to fund DHLC's cash flow requirements. For the nine-month September 2009 period, operating loss was $7.4 million, an improvement over the prior year loss for the period of $13.9 million, but $6 million unfavorable to budget.

Despite DHLC's strong reputation as a provider of quality cardiac, pulmonary, and vascular services in New Jersey, operations have been affected by declining utilization leading to a decline in revenues. Net patient revenues decreased by 5.4% in fiscal 2008 and a further 8.6% drop was reported for the nine-month interim period. Overall discharges decreased by 3.3% in fiscal 2008 and by 7.1% for the September interim period. Open heart volume declined by 11% in fiscal 2008 and 23% for the interim period as less invasive modalities are employed to treat patients and due to loss of market share.

Fitch views positively the recently signed Binding Letter of Intent from Our Lady of Lourdes Health System, part of Catholic Healthcare East, to provide the funds to establish and operate a Satellite Emergency Department at the DHLC site, which management expects to bolster utilization by acting as a feeder for DHLC's services. The addition of an emergency department is particularly timely given the expected expansion of the nearby McGuire Air Force Base, which is being converted to the nation's first Mega Base, incorporating personnel and their families from the Army, Navy and Coast Guard. Fitch also views positively the fact that management had terminated two swaps prior to the market collapse, thus avoiding further liquidity strain.

The Negative Outlook is based on Fitch's concern with the continuing sizeable, albeit reduced, operating loss in 2009, and a liquidity position that provides little flexibility to fund DHLC's liabilities and ongoing capital needs.

Deborah Heart and Lung Center is a 161-bed tertiary care cardiac, pulmonary, and vascular care facility, which is located in Browns Mills, NJ (approximately 20 miles from Trenton). DHLC had total revenues of approximately $129.7 million in fiscal 2008. DHLC covenants to disclose only annual audited financial information (within 120 days) to the Municipal Securities Rulemaking Board's EMMA system, which Fitch views negatively. However, Fitch does note that DHLC's bond covenants date back to documents produced in 1993 when the expectations for disclosure were not as thorough. Currently, DHLC does provide quarterly and annual audited information to the trustee and the New Jersey Health Care Facilities Financing Authority as well as to bondholders upon request.

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