Hawaii State Department Of Budget & Finance's 2002A Special Purpose Revenue Bond Rating Cut To 'B-' On Operating Losses

FARMERS BRANCH (S&P Global Ratings) March 24, 2020--S&P Global Ratings lowered its long-term rating on the Hawaii State Department of Budget & Finance's series 2002A special purpose revenue bonds to 'B-' from 'B'. The bonds were issued for the Kuakini Health System (Kuakini). The outlook is negative.
Pledged revenues of the obligated group secure the bonds. Kuakini Foundation, which is outside the obligated group, guarantees the series 2002A bonds.
"The lower rating reflects Kuakini's persistent operating losses, minimal cash flow, and thin unrestricted reserves," said S&P Global Ratings credit analyst Patrick Zagar. Moreover, though not in violation, the hospital remains vulnerable to its 1.1x coverage covenant as it has not yet achieved a sustainable level of operating performance and remains reliant on unrestricted donations and cash transfers from its foundation to satisfy operating needs and financial covenants--the foundation is outside the obligated group but fully reflected in our analysis and cited financial metrics as appropriate. After some incremental improvement into fiscal 2019, interim 2020 results represent a regression away from the previous trend of narrowing operating losses mainly due to softer inpatient volumes and a rise in labor expenses. The pressure has been so pronounced, a $1 million cash transfer was made from the foundation to the hospital to support operating needs. Though management is expecting second half results to be closer to operating breakeven, we believe broader questions remain surrounding Kuakini's path toward longer-term viability and structural balance.
The negative outlook reflects our view of Kuakini's still constrained operating results, limited unrestricted reserves, and thin financial cushion above covenants with a reliance on donations and transfers from the foundation. We believe the hospital remains vulnerable to unexpected operating challenges and has not yet achieved financially sustainable operations. The outlook also reflects our belief that Kuakini's business profile provides inherent headwinds to improving the aforementioned weaknesses.
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