AU Health bonds continue slide as construction set to start on Columbia County hospital

AU Health is facing a downgrade in its bond rating just as it is set to begin construction on a new hospital in Columbia County.

The bond rating agency Moody's last week downgraded AU Health's bonds to B2 from Ba3, and said that the hospital has $244 million in debt outstanding. That followed a downgrade last year from Ba1 to Ba3; everything below Ba1 is considered non-investment grade — a potentially high risk buy.

"Additionally, funding sources for AUHS's new hospital construction have not yet been solidified, although construction is set to begin by June 1, 2023 and the project has an estimated completion date of 2025," the Moody's report noted. It went on to add that the report did not take potential future debt into account, but that the project could drive the bond rating down even more in future absent external funding.

Matthew Cahill, lead analyst for Moody's who worked on the report, said AU Health did not share any information on the funding of the new hospital. He said AU Health's bond rating had steadily declined since 2018, and fell below investment grade in 2021.

Raymond Hill, senior lecturer of finance at Emory University, said the downgrading does not necessarily mean disaster.

"It's a serious event ... certainly serious if they fall below investment grade," Hill said, but cautioned against overdramatizing the decision. "Maybe ... it's a really bad event. But I would just be aware that what Moody's says is not definitive, always."

Although not factored into the rating, Moody's did point to a potential partnership between AU Health and the Atlanta area Wellstar Health System as a way to improve the financial situation. In December, the two organizations signed a letter of intent.

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A timeline of the new Columbia County project published by AU Health, which includes a 100-bed, 240,000-square-foot hospital and a 92,000-square-foot medical office building, shows a groundbreaking for early summer.

"The plans for Columbia County are progressing," said Rick Plummer, assistant vice president of Marketing and Branding at AU Health.

Plummer confirmed that the June 1 date for beginning construction, listed in the Moody's report, was correct, but had no information about the bonds.

AU Health's past bonds seem to have been issued through the Augusta Economic Development Authority, which serves as a pass through. Neither AEDA or Richmond County bears any financial responsibility for the bonds. Cal Wray, executive director of AEDA, said he knew of two bond issues through the authority for AU Health in the five years he had been there.

Because the new hospital is in Columbia County, though, AEDA cannot issue the bonds. Instead, according to Columbia County Public Relations Manager Cassidy Harris, the bonds will be issued by a new Hospital Authority board. That board has been approved, but does not yet exist.

"They have not even been appointed," Harris said.

The Columbia County Board of Commissioners voted for a resolution authorizing the Hospital Authority on Feb. 21. The resolution sets out four terms for the board members, but does not list out how many members the board will have or how they will be appointed. Harris said that these details will be established in a separate set of by-laws.

Moody's sees a negative outlook for AU Health debt

AU Health has run negative balances in recent years. According to the 2022 fiscal year audit, they lost $108 million on $1.095 billion in total revenue.

AU Health has an obligation on its current bonds to maintain a certain debt service coverage ratio, or a ratio of income to the amount owed. If it falls below a certain ratio two consecutive years, the debt will be considered in default unless there is a further agreement with the bond holders.

The bonds were investment grade when issued, according to information shared by Hill, the Emory professor, in an email. They were trading at about 80 cents on the dollar.

"If this were a normal company, you might see an another company make a bid for the debt at a discount as a cheap way to acquire the company out of bankruptcy," Hill wrote in the email.  "However, I imagine Medical College of Georgia would not let one of its teaching hospitals go through the financial chaos of a bankruptcy, so a deal will be done with Wellstar before that happens."

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Wellstar had no comment on the bond rating or when additional information might be available on the agreement.

The potential partnership between AU Health and Wellstar has not been without controversy.

The Georgia Senate took aim at Augusta University and the University System of Georgia last week in the state budget, potentially as a roundabout shot at Wellstar. The Senate budget cut $105 million from USG, an amount that matches what the state Legislature gave to AU Health earlier in the session for a new electronic medical record system. It's a system Wellstar would benefit from in a future partnership.

Wellstar opposed changes to Georgia's Certificate of Need legislation that would have allowed the construction of new hospitals in some counties without a state permit. Lt. Gov. Burt Jones has championed the changes to the CON legislation in Senate Bill 99, which would allow for a new hospital potentially on land owned by Jones's family.

Jones has also taken direct aim at Wellstar, including in an op-ed in the Atlanta Journal Constitution. In a statement, Wellstar rejected Jones's accusations.

"Wellstar and other healthcare partners have voiced concerns with SB 99 and similar pieces of legislation for many years, and we conveyed those concerns to lawmakers in a respectful, informative way earlier this session, as we have in the past," the statement read.

This article originally appeared on Augusta Chronicle: AU Health bond rating drops, but construction, partnership moves ahead