California health district’s financial woes could lead to bond covenant breaches

Palomar Health, an Escondido-based two-hospital system, which was downgraded by Moody’s Ratings to junk in October, has reported a $165 million operating loss for the fiscal year ended June 30.

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, Moody’s wrote.

The district operates acute care facilities in the San Diego County towns of Escondido and Poway.

Both Fitch Ratings and Moody’s downgraded the system’s ratings to junk this year.

When Moody’s downgraded the revenue ratings to B2 from Baa3 and it’s 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 outstanding revenue debt,” adding unrestricted cash to debt was only 11% at March 31.

The system still holds an A1 insured long-term rating.

Concurrently, Moody’s placed the ratings under review for further downgrade. Previously, the outlooks were negative.

Palomar has approximately $711 million of revenue bonds outstanding; GOs total $621.6 million, inclusive of $240.6 million in accrued interest on the capital appreciation bonds, Moody’s wrote.

Fitch Ratings downgraded the system to BB-plus on April 29 and assigned a negative outlook. S&P Global Ratings assigned an AA long-term debt rating on Oct. 28, and placed the system on credit watch, but assigned a stable outlook. S&P also assigned a BB-plus underlying rating on April 2, and placed the rating on credit watch negative.

Moody’s said it’s “downgrades reflect very thin cash balances, ongoing cash flow losses and our expectation that June 30, 2024, covenants will be breached. Prior financial challenges have been impacted by significant operational disruptions arising from a cyber incident in May experienced by Arch Health Partners, Inc.”

These factors “contribute to Palomar’s escalating governance risks in the areas of financial strategy and risk management, as well as management credibility and track record, a key driver of the rating action,” Moody’s wrote.

Moody’s ratings review “will also assess Palomar’s progress in stabilizing liquidity, cashflow losses and resolving covenant breaches,” analysts wrote.

A Palomar spokeswoman could not be reached for comment.