Florida's Hialeah Hospital, an investment-grade credit when it sold $62 million of bonds two years ago, was slashed to CCC last week by Standard & Poor's Corp. after hospital officials raided the debt service reserve fund.

Hialeah's income statements for the past three years seemed to indicate gathering financial strength, earning the facility's bonds a BBB in 1989, explained Arrick, a rating officer at Standard & Poor's. "But behind the income statements, their fund balance continued to erode and the credit was being undermined," he said.

And so far in 1991 there has been no question that Hialeah is scraping bottom.

The facility lost $4.3 million in the first 10 months of the fiscal year, mainly because of dramatic declines in admissions. This year's 23% drop in new patients follows a 6% decrease in 1990.

Standard & Poor's officials said Hialeach took $900,000 from the debt service reserve fund to make its Aug. 1 interest payment, leaving about $5 million.

To avoid a technical default, the hospital is required to start replenishing the fund by repaying one-twelfth of the $900,000 along with the regular September interest payment. That initial step was accomplished on Sept. 1, according to the rating agency. Similar monthly payments are required until the entire balance is restored.

Stanley Grube, executive director at Hialeah, declined to discuss the reserve fund raid, other than to say the situation has not yet resulted in a technical default.

Hospital officials and representatives of First Boston Corp., which underwrote the 1989 bond deal, held an informational meeting for investors on Friday. But they required everyone who attended to sign a document pledging not to disclose what was discussed.

In addition to protecting the hospital's fiscal performance from outside scrutiny, the confidentiality agreement also effectively prevents investors from selling their bonds without Hialeach's permission, sources involved in the deal said.

That is because full disclosure required to avoid insider trading on such a sale would mean revealing information learned at the meeting. But the confidentiality agreement forbids such a disclosure without written permission from the hospital.

"This is confidential information between the hospital and bondholders," Mr. Grube said in explaining the need for the agreement.

He characterized last week's exchange with investors as a "good meeting with positive results."

He added, "We have the support of our investors and medical staff, and the political and health-care community."

But several health-care analysts suggest severe management problems are to blame for Hialeah's tumble.

Standard & Poor's noted that the current management team is the hospital's third in four years.

Robert A. Fuller, a managing director at the agency, said existing management has been in place for only six months, so it is difficult to be critical yet. But, he added, while Hialeah's plant and service area both appear to be in reasonably good shape, "something is just not happening."

Fiscal problems at the hospital, "combined with management's perceived inability to clearly define what the problem is and what should be done about it" led to the rating change, Mr. Fuller said.

Mr. Arrick added: "They have begun to take some steps, but we have the sense that the problem definition stage is still ongoing, and while that's good, we felt the defining of the problem should have been farther along. They never really had an explanation for all of what's been going on."

Mr. Grube responded that he and the rest of the management team are "exertuing all the effort necessary to turn the operation around." He said spending reductions in middle managment were implement last month and should start showing results shortly.

Standard & Poor's agreed those steps were faborable, and gave the credit a "stable" outlook as a result.

"The hospital has entered into a number of exclusive controled with managed-care providers and expects these contracts to reverse the negative admissions trend," the rating agency said. "Moreover," management has brought in a consultant to review the situation and has taken steps to reduce expenditures."

Many of Hialeach's problems stem from increased competition from other Miami hospitals, Standard & Poor's added. In addition, Florida refused to license the hospitals new psychiatric unit in 1989, forcing it to close the opeation and contributing to the hospital's huge admissions decline.

Mr. Grube said the licenses rejection was the result of a determinations by the state that Miami already had too many psychiatric beds. But Standard & Poor's said that prior to the state's ruling, Hialeah officials operated the psychoiatric facility as if approval from the state was a matter of course.

Moody's Investors Service does not rate the bonds.

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