Cyber event cited in Palomar Health ratings falling further into junk territory
BY SourceMedia | MUNICIPAL | 12/20/24 12:46 PM ESTThe ratings of troubled Palomar Health, an Escondido-based two-hospital system, took another hit this week, falling further down the Fitch Ratings junk scale as its financial situation worsened.
In a Wednesday report, Fitch cited a "significant cyber event that lasted several months, severely disrupted operations and key billing functions," in explaining why it downgraded Palomar's
The hospital system was the subject of a cyber attack on May 5, during which the hospital system took its systems offline including a patient portal, phones and faxes, according to Becker Hospital Review.
But, the San Diego-based healthcare system also has violated its debt service coverage and days' cash on hand covenants; and Fitch's "forward-looking analysis indicates the district's financial profile metrics will remain challenged in the medium term."
Management has a financial turnaround plan and Fitch said it expects potential improvements to eventually rebuild the organization's liquidity.
"Hospitals throughout the state face increasing challenges from rising costs and falling revenues. Palomar Health is no different," said Palomar Health CEO Diane Hansen.
The hospital system's current financial woes have raised questions about its solvency, but Hansen said, "While Palomar Health is certainly under financial pressure, there is no reason to think it will need to enter bankruptcy."
"Palomar Health's Board of Directors, its management team, its doctors, its nurses and its key lenders and partners are united in ensuring Palomar Health remains a healthy and strong participant in the healthcare of North County San Diego," Hansen said. "Leadership wants the community to know it is not going anywhere."
The healthcare district "also anticipates signing a forbearance agreement with bondholders," which Fitch said it will review once available.
Fitch also lowered the ratings on the system's general obligation bonds to BBB-minus from A and placed it on negative rating watch.
The San Diego County not-for-profit's financial woes were dire enough to earn junk ratings from Fitch, Moody's Ratings and S&P Global Ratings earlier this year.
Palomar Health is the largest public health care district in California, with over $1 billion of revenues reported for fiscal 2023, and over 24,000 admissions, according to Moody's October ratings report.
Palomar's
The system's financial performance has been challenged over the past 18 months.
In addition to the cyber event, it has experienced declining volumes, higher labor and supply expenses, programmatic delays, a substantial and rapid decline in reserves and days' cash on hand, and has a high debt burden and leverage, according to Fitch analysts.
Fitch said its Wednesday downgrade reflects Palomar's
Palomar
When Moody's downgraded the revenue ratings to B2 from Baa3 and its general obligation unlimited tax ratings to Baa3 from Baa1 on Oct. 22, analysts noted, the ratings are under review for further downgrade "as we assess risks related to breaching financial covenants which, absent lender cooperation, could lead to acceleration of all of Palomar's
The downgrade of Palomar's
The negative outlook "incorporates the persistent operational challenges Palomar
Credit strengths include the district's sizable market position, historical track-record of good cash-flow generation, and diverse tax base, Fitch analysts said, adding the unlimited nature of the tax levy offsets potential risk regarding tax base volatility.
Fitch said it views Palomar's
The rating agency said it "will continue to monitor the trajectory of the organization's market presence and volume trends, as well as the subsequent impact upon performance."
The healthcare system's bonds could be further downgraded "if Palomar
"The structure of the forbearance agreement could also trigger negative rating action, should it result in material changes to the initial repayment schedule or amount," Fitch wrote. Or, "if capital-related metrics (unrestricted cash to adjusted debt and debt to capitalization) continue to decline from current levels."
If the operating performance improves significantly, and Palomar