The credit rating on Whidbey General Hospital’s $50-million general obligation bonds to fund the expansion of the Coupeville facility was recently upgraded as the hospital’s new administration focuses on financial health.
In addition, Moody’s Investment Service reported that the hospital’s credit outlook jumped from “negative,” past the “stable” middle ground to “positive,” which Chief Financial Officer Ron Telles said is a rare move and a sign that the rating agency has confidence in the hospital’s new fiscal direction and “financially astute” management.
“We had an amazing turnaround,” he said. “Everybody had a hand in this. It was a lot of hard work by everyone on the team.”
While it’s a big step forward, the bonds’ “Baa2” rating is still significantly lower than it was originally set due of the agency’s concerns about the hospital’s liquidity, operating margins and patient volumes, Moody’s reported.
Voters passed a $50-million bond in 2013 to fund an expansion of the hospital. Not long afterward, the hospital moved to electronic patient records and billing, a process that Telles said was difficult and was the cause of much of the hospital’s recent financial problems.
Oak Harbor resident Jim Pace said he invested $30,000 in the hospital’s expansion bonds as part of his investment portfolio and isn’t happy about the outcome. He said he got a letter a few months after he made the investment alerting him that it was downgraded.
The value plummeted, he said. At its lowest point it was valued at about $18,000, though it’s improved in the last month.
Moody’s initially assigned a rating of “A2” to the hospital’s general obligation unlimited tax bonds in 2013, but with a negative outlook because of the hospital district’s “weak financial position” and “relatively uneven performance history and a somewhat aggressive capital project,” the agency reported.
The A2 rating is in the upper medium range of the credit rating tier.
In April 2015, Moody’s downgraded the bonds to Baa3, which is at the bottom of the lower medium grade and the outlook remained negative. One step lower would be considered non-investment grade speculative.
Moody’s explanation of the downgrade sounded dire.
“The downgrades primarily reflect a continued trend of financial instability and very low liquidity levels which are not expected to improve materially over the forecast horizon,” Moody’s reported. “The Ba2 limited tax G.O. (general obligation) bond rating also incorporates the limited nature of the ‘regular’ operating levy securing the bonds as well as uncertainty around the district’s ability to collect operating taxes and pay debt service in the event that the hospital becomes insolvent or the district seeks bankruptcy protection.”
The hospital also has $14.2 million in general obligation limited tax bonds, which were upgraded to Baa3 from Ba2.
Things turned around last month when Moody’s upgraded the bonds to Baa2, though it is still in the lower medium grade. But the outlook is now considered positive.
“The upgrades reflect an emerging trend of significant financial improvement following a period of financial deterioration and extreme stress that ended in fiscal year 2013,” Moody’s reported. “While the trend has reversed, and the audited fiscal year 2014 and unaudited fiscal year 2015 results show the district has grown reserves since hitting a low point in 2013, financial flexibility is expected to remain somewhat limited over the near- to medium-term.”
The new administration is focused on the budget. Geri Forbes was named CEO near the beginning of 2015. Telles was hired as CFO last summer, after the credit downgrade. He admits it was “a little scary” to learn that the hospital’s financial outlook was considered negative.
“I knew when I took this job it was going to take some work,” Telles said. “It’s going to take a lot of people in the right places.”
Telles said glitches in the hospital’s move to electronic medical records and electronic billing had a lot to do with the financial stresses, especially since the hospital had trouble getting bills out. The hospital ended up having to dip into reserves to fund operations.
The hospital’s “legal budget” for 2015 showed a loss of $4.9 million.
“You can only dip into reserves so much before it starts getting scary,” he said.
The hospital increased reserves to 40 days of “cash on hand,” which Telles said is better, but not comfortable. By year’s end he hopes to increase cash on hand to 60 days.
Telles said he has concerns about patient volumes since the hospital has some perception problems in the community, but he hopes that is changing. The emergency room is very busy, but he hopes to see growth in outpatient surgery.
In general, running a small hospital has a lot of built-in challenges in an ever-changing regulatory climate, Telles said, adding that hospitals with high ratings on bonds tend to be large institutions with a lot of resources to draw on.
Telles said Whidbey General’s current bond ratings are solid when compared to other similar hospitals.
Moody’s reported in August of 2014, for example, that Skagit Regional Health revenue bonds affecting $110 million, were affirmed at Baa2 with a stable outlook.
In October of 2014, Moody’s assigned Island Hospital in Anacortes with a A2 rating — a “high grade” — and a stable outlook.
Oak Harbor City Administrator Doug Merriman said the city will issue up to $50 million in revenue bonds later this year to fund the new sewage treatment plant.
Merriman said he expects Standard & Poors to issue an AA rating, which is high grade.
Yet, both Merriman and Telles said it doesn’t really make sense to compare the hospital and city’s bonds since they are very different entities.
Merriman noted that the ratings are “bond specific.”
As for Pace, he said he won’t lose money on his hospital investment as long as he keeps it until it matures, which is in 2037, or at least waits until it recovers.
“I don’t think Whidbey General will be closing its doors any time soon,” Pace said.