Sep 5 2009
Fitch Ratings has downgraded to 'C' from 'CC' the rating on approximately $45.5 million of bonds (listed below) issued by Valley Health System, California (VHS). In addition, Fitch has placed the bonds on Rating Watch Negative.
On July 27, 2009, VHS' board of directors voted to enter into an exclusive 90-day agreement with Physicians for Healthy Hospitals (a group of local doctors) for the potential sale of the district's assets, including its two hospitals, Hemet Valley Medical Center and Menifee Valley Medical Center. It is not clear what the use of proceeds would be if such a sale were to occur.
Fitch's 'C' rating indicates that payment default to bondholders appears imminent. As Fitch has reported in its recent rating actions, VHS remains under Chapter 9 bankruptcy protection (since 2007) while it attempts to implement several ongoing turnaround initiatives. However, unaudited interim financial statements for FY 2009 show continued operating losses that fell far short of budgeted targets, as VHS posted an operating loss of $7.6 million compared to a budgeted operating surplus of $3 million. In addition, VHS has failed to replenish the debt service reserve funds (DSRF) on its 1993 COPs and 1996A bonds as management projected. Current DSRF funds may not be sufficient to make the Nov. 15, 2009 interest payments to bondholders.
Finally, the recent departures of VHS' CFO and CEO in May and August 2009, respectively, are indicative of continued operational and financial instability. As of June 30, 2009, unrestricted cash and investments totaled $11.8 million, representing 24.9 days of expenses. For the 12 month period ended June 30, 2009, operating EBITDA was slightly positive, at 0.6% on $167.7 million of net revenues.
Fitch will closely monitor the outcome of these negotiations and will update the market accordingly.
Fitch downgrades Valley Health System's outstanding debt as follows:
--$4.9 million hospital revenue bonds (refunding and improvements project), 1996 series A to 'C' from 'CC';
--$40.6 certificates of participation (refunding project), series 1993 to 'C' from 'CC'.
http://www.valleyhealthsystem.com/getpage.php?name=index