(Bloomberg) -- A 344-bed hospital in Alabama’s capital, Montgomery, defaulted on $60 million of municipal bonds, failing to meet a bondholder trustee’s demand for immediate repayment of the debt.
The non-profit Jackson Hospital & Clinic, squeezed by high labor costs and inflation, didn’t make an interest payment that was due to be paid on Sept. 3, according to a filing. Last month, UMB NA, the bond trustee, demanded full payment of all principal and interest, saying the hospital had breached the terms of bond documents by failing to make rent and lease payments for five months.
Pat Mathews, Jackson’s interim chief financial officer, didn’t respond to a request for comment. Jackson bonds with a 4% coupon, maturing in 2036 last traded at about 53 cents on the dollar on Aug. 27.
Since the pandemic, the health-care sector has been slammed by a shortage of caregivers and elevated wage and supply costs. Although labor challenges are easing, median operating margins for hospitals rated by Fitch Ratings are only slightly positive at 0.4% using audited 2023 data. Hospitals that treat older and poorer populations and that depend more on government reimbursements continue to struggle.
The hospital last sold publicly offered muni debt in 2015 when it brought $84 million to market to refinance outstanding securities and pay for capital improvements, according to bond documents. At the time, the bonds were rated BBB by S&P Global Ratings and Baa2 by Moody’s Ratings — both investment-grade designations.
In the last few months, companies downgraded Jackson Hospital deeper into junk, saying the hospital was bleeding cash. S&P on Wednesday downgraded the bonds to D on the missed payment from CC.
“We understand, based on limited public and unaudited financial statement data, that Jackson’s liquidity is very thin and likely insufficient to meet the bondholders demand for full payment,” S&P said in an Aug. 13 news release.
As of Aug. 12, Jackson hadn’t produced audited financial statements for the fiscal years ended Dec. 31, 2022, and Dec. 31, 2023, S&P said.
Jackson’s board of trustees in June approved an affiliation agreement with HumanityCorp, a private equity firm, according to a filing by Regions Bank, which was replaced by UMB as bond trustee in July. HumanityCorp’s website says it enables non-profit hospital systems to convert back office cost centers into financial assets, while generating attractive returns for investors.
(Updates with details on 2015 bond issue for hospital in the fifth paragraph.)
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