San Diego’s Palomar Health placed on Moody’s review for downgrade

Bonds

A stark decline in reserves and cash on hand that could put bond covenants at risk resulted in San Diego-area Palomar Health’s ratings being placed under review for downgrade by Moody’s Investors Service.

Moody’s currently rates the general obligation bonds A1 and the revenue bonds Baa3. If the revenue bond ratings are downgraded one notch, they would fall into junk bond territory.

“The current trend of financial results puts financial covenants at risk for a breach at June 30, 2024, which could result in the acceleration of outstanding debt,” wrote Rita Strauss, assistant vice president/analyst and Eva Bogaty, associate managing director in the report released Friday.

“The current trend of financial results puts financial covenants at risk for a breach at June 30, 2024, which could result in the acceleration of outstanding debt,” wrote Rita Strauss, assistant vice president/analyst and Eva Bogaty, associate managing director in the report released Friday.

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The outlook on the GO bonds was revised to negative from stable in June on concerns related to cash on hand. Formal reviews are typically concluded within 90 days.

Moody’s said its decision to place the ratings under review for downgrade was driven by a material and unexpected decline in unrestricted cash reserves, through December 31 that has resulted in the healthcare provider falling to roughly 39 days of cash on hand.

“Palomar’s operating performance has weakened significantly with negative operating cash flow (OCF) reported for year-to-date December 31, 2023, results, leaving little room for stabilization of liquidity,” Strauss and Bogaty said.

Palomar Health has approximately $712 million of revenue bonds outstanding and $646 million of GO bonds outstanding.

It is the largest public healthcare district in the state by area, stretching 800 miles. It operates acute care facilities in the San Diego County towns of Escondido and Poway, where it has 44.5% of market share. It reported more than $1 billion in revenues in fiscal 2023 and generated over 24,000 admissions, according to Moody’s.

Diane Hansen, president and chief executive office of Palomar Health said there is no danger of Palomar Health missing a bond payment.

“Palomar health has plans to address cash reserves — nearly $150M-plus that will flow to the health system by the end of the fiscal year in addition to other operational improvements,” Hansen said.

The Moody’s review will focus on Palomar’s performance improvement plans as well as strategies to grow and stabilize cash reserves.

“An understanding of financial and covenant projections for June 30, 2024, results will be critical to our assessment,” Strauss and Bogaty wrote.

The factors that could lead to a Moody’s downgrade include: the failure to improve cash to at least 100 days of cash on hand with growth plans thereafter, an inability to improve operating performance to at least 4% as well as demonstrating a path to ongoing growth, an expectation of violation of revenue debt covenant requirements and issuance of incremental revenue debt.

The revenue bonds are backed by the gross revenues of the obligated group members, which includes Palomar Health and Arch Health Partners, Inc. (d/b/a Palomar Health Medical Group).

The district’s general obligation unlimited tax bonds are payable from ad valorem taxes on taxable property. The GO security is enhanced by a lockbox mechanism in which property tax payments are wired by San Diego County directly to the paying agent for debt service payments.

The most recent ratings report from Fitch Ratings and S&P Global Ratings came in October 2022 ahead of a bond sale. The ratings are BBB-minus from Fitch and BBB from S&P. Both assigned stable outlooks.

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