The rating downgrade is the result of negative operations in fiscal 2008 (yearend Oct. 31) and a drop in liquidity due to a combination of operating lossesand unrealized losses on investments. Year-end unaudited results for fiscal 2008show a negative 4.3 operating margin, equating to a $6.9 million loss. Giventhe loss from operations, Marshall will not be able to meet its debt servicecoverage target of 1.2 times and has reached out to Cal-Mortgage forinstructions on how to proceed. Bond documents indicate a consultant call-in.Marshall remains in compliance with its days cash on hand liquidity covenant of35 days.
A significant factor in Marshall's negative operating performance was CaliforniaPublic Employees' Retirement System's decision in 2007 to pull its Blue ShieldEPO product from El Dorado County, Marshall's primary service area (PSA). As aresult patients switched to other payors, which resulted in lower reimbursementor loss of volume. The slow economy also contributed to an increase in self-paypatients at Marshall and affected inpatient volumes, which were down year overyear partly due to patients postponing elective surgery, as well as to thedeparture of two cardiologists from the area. Two new cardiologists have beenrecruited and are expected to start in July 2009. Other factors affectingMarshall's operations were a 10 reduction in reimbursement by MediCal from July2008 through October 2008 and an increase in costs related to specialty coveragein Marshall's emergency department.
Marshall's liquidity, which has historically been light for the 'BBB' category,weakened further in fiscal 2008. Further negative pressure on Marshall'scredit profile has come from unrealized losses in the company's pension planinvestment portfolio that resulted in a $7.1 million adjustment to the plan atyear-end fiscal 2008. The Rating Outlook remains Negative and reflects the challenging environmentthat Marshall will continue to operate in over the near term, includingfinancial commitments to its master facility plan. Should Marshall have anotheryear of negative operating margins or additional deterioration in its currentliquidity and capital ratios, further negative pressure on Marshall's rating mayoccur and additional rating action may be warranted. Marshall is budgeting forpositive operating results in fiscal 2009, which Fitch believes is achievable.Marshall remains the sole acute care hospital in its PSA, the western slope ofEl Dorado County, with a leading 55 inpatient market share.
Additional positiveoperating factors for fiscal 2009 include MediCal's restoration of the 10 cutin reimbursement as of Nov. An ongoing credit concern of Fitch's has been delays to Marshall's masterfacility plan. Completed parts of the plan, such as an $11 million outpatientsurgery center in Cameron Park, has helped to grow outpatient volumes over thepast few years; however, a significant piece of the plan, a new three-storywing, is two years behind schedule. In November 2008, Marshall finally receivedall the approvals from state and local agencies needed to proceed and has begunthe first phase of the project, which is the clearing away of land. The obstetrics center, which will have allprivate rooms, is a critical component of Marshall's strategic plan to stem theflow of outmigration of births to Folsom and Sacramento.