Whidbey Health’s ratings fall further into junk territory

A Washington state hospital district’s ratings fell further into junk territory and were placed on review for further downgrade, reflecting what Moody’s Ratings called “severe and immediate liquidity challenges.”

Moody’s downgraded to B1 from Ba3 Whidbey Island Public Hospital District’s Series 2013 unlimited tax general obligation (GOULT) bonds affecting $43.9 million in debt. Moody’s also downgraded to Caa1 from B3 the district’s limited tax general obligation (GOLT), Series 2009 and 2012 bonds, affecting about $11.9 million.

The stable outlook was removed and the ratings have been placed on review for possible further downgrade, according to Tuesday’s report.

“The downgrades primarily reflect the hospital’s severe and immediate liquidity challenges that raise the risk of the district becoming insolvent within months unless the district is able to secure significant additional liquidity,” wrote Moody’s analyst Lianne Gonsalves and Eric Hoffmann, an associate managing director.

The healthcare district, commonly known as Whidbey Health, operates a 25-bed critical access hospital, seven satellite clinics and an ambulance service on Whidbey Island in Puget Sound, 65 miles north of Seattle. The district served 86,510 Island County residents in 2022, according to Moody’s.

Chief Financial Officer Paul Rogers reported during the board’s Feb. 14 meeting that Whidbey Health had 14.9 days of cash on hand and a net surplus of $61,000, according to the meeting minutes. Conversely, he added, the hospital is showing good year-over-year growth as operating revenues exceeded the budget by $366,000, according to the minutes.

“The review for downgrade will focus on the district’s success, or lack thereof, in gaining access to additional liquidity and its implementation of operating adjustments that could lead to greater long-term stability,” Moody’s analysts wrote.

The downgrade of the GOULT bonds to B1 reflects Moody’s view of the increased risk from the hospital’s operations given its “current liquidity challenges, that could rapidly deteriorate even further with even a minor financial disruption,” according to analysts.

The rating also reflects the expectation that debt service for the GOULT bonds will continue uninterrupted regardless of the financial stress on the hospital. The GOULT bonds benefit from an unlimited ad valorem tax levy that is collected for only the repayment of the bonds. The region also has a growing tax base, average wealth and income levels and the stabilizing presence of the Naval Air Station Whidbey Island.

Moody’s attributed the higher exposure to the operating and enterprise risks of the Caa1-rated GOLT bonds for the three-notch difference between the two bond categories. The GOLT bonds are paid by all available operating revenues, including the regular operating levy, while the GOULT bonds are backed by an unlimited ad valorem tax levy.

“The downgrade to Caa1 on the GOLT rating reflects the hospital district’s significant drop in liquidity reflected by its very weak days cash on hand per district provided cash projections that could go negative starting in the next few months,” Moody’s analysts wrote. “If the district’s negative cash projections were to materialize it would threaten the hospital’s ability to continue its operations with the possibility of the district going out of business or becoming insolvent, leaving the GOLT bonds more exposed to default.”

Governance was also cited by Moody’s as a key rating driver indicative of district management’s inability to effectively manage its operations and cash position.