Wake Forest Baptist Medical Center has had a second credit-rating agency to lower its rating for bonds issued by the center.

Standard & Poor’s Ratings Services said Friday it has lowered its rating from AA- to A+ for bonds issued for the Wake Forest Baptist Obligated Group.

The N.C. Medical Care Commission issued health facilities revenue bonds for the Wake Forest Baptist entity, which was formed in March 2011 by N.C. Baptist Hospital, Wake Forest University Health Sciences and Wake Forest Baptist Medical Center.

The AA- rating is at the lowest of four levels in the high-grade investment quality category for S&P, however, it changed its outlook for Wake Forest Baptist from “negative” to “stable.”

"The downgrade is primarily due to WFB’s weak operating performance, and our expectation that operating results won’t reach prior forecasted levels in the near term,” S&P credit analyst Liz Sweeney said in a statement.

Sweeney said another factor was “a modest reduction in balance-sheet strength driven by lower reserves and additional debt in fiscal 2013.”

On March 20, Moody’s Investors Service’s downgraded the center’s long-term debt rating below the lowest level of high-grade investment quality, or to A1 from Aa3. Moody spokesman David Jacobsen said Friday the center’s rating and stable outlook have not changed.

Moody said it kept a stable outlook because the center is cutting expenses to stabilize its financial performance.

Edward Chadwick, the center’s chief financial officer, said in a statement that the S&P ratings change “was largely due to the one-time implementation costs and temporary business disruption associated with the installation of a new medical records system at the medical center in the fall of 2012.” The system is known as Epic.

Sweeney said the center’s operating results “have deteriorated in part due to the temporary business disruption and additional expenses related to its electronic medical record rollout.”

Wake Forest Baptist went live with Epic on Sept. 22, 2012, in an “all-in” approach that included its main campus and facilities. Dr. John McConnell, the center’s chief executive, has said that approach “was absolutely necessary for patient safety.” He has said he remains confident in Epic’s long-term benefit to the center.

The S&P downgrade comes a day after Wake Forest Baptist released its audited financial report for fiscal 2012-13 to bondholders. It showed an operational revenue loss of $56.6 million and an overall loss of $4.5 million. The fiscal year ended June 30. The report was filed on the Municipal Securities Rulemaking Board’s emma.msrb.org website.

The center’s operational revenue loss for fiscal 2012-13 was offset in part by $46.1 million in stock investment gains. By comparison, the center had $45.9 million in operational revenue and overall excess revenue of $88.7 million in fiscal 2011-12.

Sweeney said other factors affecting the downgrade include “a challenging research funding environment, much slower volume growth, lower provider tax revenue and sequestration cuts.” She said the center borrowed $104 million in fiscal 2013 on a line of credit “due to the slow revenue collections related to the (Epic) rollout.”

Chadwick cited Sweeney’s list of financial challenges in his statement.

"We believe that residual expenses related to the IT rollout and a slower volume environment will continue to weigh on operating results, although we expect operating income to rebound to positive territory in 2014 as management’s corrective actions demonstrate results and the disruptive effect of the IT rollout diminishes,” Sweeney said. “Our expectation that operating results will rebound measurably in fiscal 2014 is a key reason for the stable outlook.”

Chadwick cited Sweeney’s optimism about Wake Forest Baptist’s commitment to a financial rebound in his statement. “The medical center is committed to improving operating performance, while continuing to provide high-quality patient care as one of the country’s best hospitals,” he said.

Sweeney addressed Wake Forest Baptist’s continuing royalty dispute over the WoundVac medical device. She estimates the dispute has reduced the center’s revenue stream by $40 million to $45 million annually in recent years. A trial date has been set for April 7 on Wake Forest University Health Sciences’ lawsuit against Kinetic Concepts Inc.

"WFB is currently not accruing any revenue from the license under dispute,” Sweeney said. “Therefore, we believe that WFB has only upside potential for its credit in this situation.

"A sizable settlement or court victory could lead us to reassess the rating.”

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