Wake Forest Baptist receives rating downgrade by Moody’s

A view of Wake Forest Baptist from May 26, 2011. (File Photo)

A view of Wake Forest Baptist from May 26, 2011. (File Photo)

WINSTON-SALEM, N.C. — A bond rating credit service Friday downgraded Wake Forest Baptist Medical Center from an A1 rating to A2, but assigned the center a stable outlook, according to the Winston-Salem Journal.

Moody’s Investors Service assigned the A2 rating to bonds issued by Wake Forest Baptist and North Carolina Baptist Hospital, which Moody’s considers a separate entity for oversight purposes.

In June, Moody’s placed both groups’ A1 rating under review for possible downgrade.

Wake Forest Baptist is Forsyth County’s largest employer. The medical center has 14,686 employees combined at its locations in the Triad, but has announced plans since November 2012 to cut about 1,300 jobs.

In its update, the credit rating agency said the downgrade reflects the financial setbacks that Wake Forest Baptist has had over the last several years and Moody’s assessment that its financial flexibility has been reduced.

“If Wake Forest Baptist is unable to demonstrate quarterly improvement during fiscal year 2015, the outlook could be revised to negative,” Moody’s analyst Daniel Steingart wrote.

The most recent challenge for Wake Forest Baptist was its $103.8 million write-off of accounts receivable for fiscal year 2014. That affected 2013 and 2014 fiscal years.

“Operating performance deteriorated for the third consecutive year in fiscal year 2014, with absolute operating cash flow declining to about a third the peak level produced in fiscal year 2011,” Moody’s said.

During its fourth quarter of fiscal 2014, Wake Forest Baptist received a litigation settlement from a legal dispute over wound treatment devices between the center and Kinetic Concepts Inc. Kinetic will pay the $280 million settlement over three years.

Because the center will be able to book the Kinetic litigation receivables as revenue in fiscal 2014, Moody’s expects the center’s full-year results will be in line with its adjusted third-quarter results, and that the center will meet its rate covenant.

Moody’s said that Wake Forest Baptist’s debt grew by $183 million in 2013, of which $97 million financed the growth in accounts receivable.

“Although market share is up over a multi-year period, the organization did suffer patient volume disruptions during the IT conversion,” Moody’s said, referring to problems and additional expenses related to its electronic medical record rollout that started in September 2012.

Speaking of Wake Forest Baptist’s strengths, Moody’s said that the center “maintains a strong market position as the only academic medical center in its service area, providing several unique quaternary services.”

Moody’s said the center has a strong balance sheet with 193 days cash on hand and 119 percent cash to debt as of March 31. The litigation settlement with Kinetic Concepts is expected to bolster unrestricted cash, according to Moody’s. The center also benefits from the receipt of material provider fee funds that began in fiscal year 2012.

“These strengths provide some stability during a prolonged period of deep operational changes within the system,” Moody’s wrote.

In response to the downgrade, Wake Forest Baptist said, “In its decision to issue a stable outlook, Moody’s cited the medical center’s ‘strong balance sheet and fundamental strengths including a strong market position and clinical reputation.’”

Wake Forest Baptist said in a news release that the rating update focused on the medical center’s turnaround plans and timing of improvement in cash flow.

“Toward this goal, the medical center has continued to aggressively implement strategies and processes to restore better financial performance and enhance existing programs aimed at providing a value-based academic health care model with emphasis on safety, service and quality,” according to the statement.

As the medical center has said in the past, it believes its financial setbacks are fixable “and we are committed to restoring the medical center to improved levels of financial performance going forward.”

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