CREDIT RATING LOWERED HOSPITAL'S DROP IN CASH CITED.

Byline: Karen Maeshiro Staff Writer

LANCASTER - Antelope Valley Hospital's bond rating has been downgraded, meaning the hospital will be perceived as a greater credit risk and have higher borrowing costs in the future.

In lowering the rating, Moody's Investors Service cited significant financial losses and a decline in cash flow, ``a turbulent political environment'' and stresses on hospital operations due to growth and closure of High Desert Hospital.

``The report coincides with our efforts at the hospital on a financial turnaround,'' hospital spokesman Ed Callahan said. ``There are areas we need to improve on. Once we do our financial turnaround and get things straightened out, the bond rating will go back up.''

The Moody's firm reported to the board at Wednesday's meeting via telephone that the bond rating was lowered from an AAA level to Baa1, affecting $67 million of outstanding debt.

The rating is on bonds that the hospital issued in 1997 to finance building projects, Callahan said.

``When a bond rating for a hospital is downgraded, it results in generally higher borrowing costs if they decide to issue additional debt,'' said Diane Viacava, vice president and senior credit officer with Moody's.

``Depending on who holds the current outstanding bonds, it could impact bondholders' decision on whether they want to continue holding bonds or trade them,'' Viacava said in a phone interview Thursday.

``We do have some concerns. We recognize the fact they have a number of strengths, including being the market leader in the service area and that management has made moves to address problems in the facility. They show good liquidity.''

Hospital director Steve Fox, a critic of the board majority and its spending, said the hospital's bond rating has never been lowered to this extent.

``Any future loans would cost us more money,'' Fox said. ``We still want to build (a hospital) in Palmdale, but the current actions of the board are injuring the finances and as a result inhibiting our ability to build in the future. Their actions of today are going to inhibit the health care of tomorrow.''

In lowering the hospital's bond rating, the Moody's report cited ``governance issues driven in part by a turbulent political environment that we believe hinders management's ability to implement corrective actions in a timely manner and which are expected to continue to challenge AVH's management.

``The negative outlook reflects our expectations that AVH's operating problems will continue as the hospital attempts to implement turnaround initiatives to improve operating performance, copes with regional utilization pressures and service area dynamics, and struggles with governance issues at the district's board.

``Although we believe that the proposed efforts could be realized in the longer term,'' the report continued, ``we believe that the hospital will face significant challenges while working to improve its operating performance.''

The report noted the closing of county-run High Desert Hospital, which has led to increased volume at Antelope Valley Hospital, especially in the emergency room, where patients wait at times up to two days for a hospital bed, the report said.

``The shifting to AVH of patients who previously would have gone to High Desert are expected to add further stress to AVH's operations. In addition, it is also expected to impact its operating performance as increasing numbers of self-paying or indigent care patients seek emergency services,'' the report said.

The report also said the hospital had historically been subject to a volatile political environment, coping with often differing goals of the district board and the executive management team.

``The relationship amongst the district board members is divisive, creating lack of consensus of the board as to a clear path for the hospital to pursue,'' the report said.

Moody's lauded the hospital's attempts to make a financial turnaround with the help of consultant The Camden Group, but said management efforts will be hampered by dissension among board members.

The dissension will continue until at least the board elections in November, the report said.

After earning record profitability in fiscal year 2002 of $14.6 million, the hospital reversed its performance, reporting an operating loss of $8.1 million for fiscal year 2003, the report said.

Operating cash flow dropped from $32.4 million in 2002 to $10.7 million in 2003, the report said.

Hospital management expects that operating loss will actually increase in fiscal year 2004, driven by unbudgeted labor costs, generally due to wage increases for the nursing staff related to a newly negotiated union contract, as well as expenses for temporary nurses and difficulty in implementing corrective actions.

Karen Maeshiro, [phone]

karen.maeshiro(at)dailynews.com