A private hospital system in Honolulu that has struggled for more than a decade saw the long-term rating on its bonds downgraded to CCC from B-minus by S&P Global Ratings.
The downgrade affected $30 million of 2002A special purpose revenue bonds issued for Kuakini Health System by the Hawaii State Department of Budget & Finance.
S&P also affirmed a negative outlook on the bonds in the ratings report published Friday.
“The lower rating reflects Kuakini’s rapid earnings and cash deterioration this past year, with unrestricted reserves falling to $9.9 million as of Dec. 31, 2020, or just 23 days’ cash on hand, from $23.3 million as of June 30, 2020,” said S&P Global Ratings credit analyst Patrick Zagar.
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The hospital system includes a 250-bed acute care and teaching hospital affiliated with the University of Hawaii School of Medicine, a medical center with doctor’s offices and a geriatric care facility.
The hospital’s bonds first fell below investment grade in 2011 when S&P downgraded it from BBB-minus to BB-plus.
The COVID-19 pandemic has, however, exacerbated the hospital system’s financial issues, according to the ratings agency, as the hospital posted a $12.2 million operating loss through the first six months of fiscal 2021, which covers Hawaii’s major COVID-19 surge in August and September.
“Though management is expecting second half results to be closer to operating breakeven, we believe it is possible that losses continue to grow,” S&P wrote. “This view, coupled with Kuakini’s lack of meaningful financial cushion, underpins the negative outlook.”
Despite the downgrade, S&P analysts wrote that they expect Kuakini to continue making timely debt service payments on the bonds over the two-year outlook period.
S&P dinged the hospital system under its environmental, social and governance criteria for increased governance risks citing leadership’s inability to adjust the organization’s strategy to attain sustainable operations that would ensure that operating earnings cover debt service and support the hospital’s long-term viability.
The hospital has fought to remain independent despite broad sector pressures that have created a precarious financial situation in which it has relied on donations and foundation transfer to subsidize clinical operations, analysts wrote.
The interim fiscal 2021 losses through Dec. 31 are technical ahead of budget, despite immense balance sheet weakening and negative cash flow, which S&P saw as indicate of weaker operational effectiveness supporting the downgrade.
The bonds are secured by pledged revenues from the obligated group, which includes Kuakini Health System, Kuakini Medical Center, Kuakini Geriatric Care, and Kuakini Support Services, secure the bonds. Kuakini Foundation, which is outside the obligated group but fully controlled by the parent, guarantees obligations of the obligated group, including the series 2002A bonds.