NEW YORK--(BUSINESS WIRE)--As part of its ongoing surveillance review process, Fitch Ratings has affirmed the following bonds issued by the Illinois Health Facilities Authority, on behalf of Decatur Memorial Hospital (DMH) at 'A+'.
--$15.1 million series 1996B
--$24.8 million series 2001
The Rating Outlook is Negative.
RATING RATIONALE:
--The Outlook revision to Negative reflects DMH's weakened financial performance over the past 18-months, which resulted in a negative 0.2% operating margin in fiscal 2010 and negative 1.6% operating margin through the six-months ended March 31, 2011 (unaudited). The main driver behind the weak profitability is a loss of market share in cardiac volume when its main competitor decided to employ the largest cardiology group in town. Further deterioration is expected through the end of fiscal 2011 as the full impact of the loss of the physician group is realized.
--Despite the loss in cardiac volume, DMH maintained a strong market share of 66.8% in 2011. DMH's main competitor, St. Mary's Hospital (part of Hospital Sisters Health System, revenue bonds rated 'AA-/F1+' by Fitch Ratings), had a 33.2% market share.
--DMH has a strong balance sheet with 272.6 days cash on hand (DCOH), 23.8 times (x) cushion ratio, and 293.2% cash to debt as of March 31, 2011. Fitch views DMH's balance sheet as a primary credit strength.
--Debt service coverage by EBITDA is solid averaging 5x over the past four fiscal years. Through March 2011, coverage was 6x, which compared favorably against Fitch's 'A' category median of 3.3x.
--DMH operates in an unfavorable service area that is highlighted by decreasing population trends and persistent high unemployment. Correlated with the poor service area demographics is DMH's high Medicaid payor base of 13.2% of gross revenues, which Fitch views as a credit concern.
What Would Trigger a Downgrade?
--Greater than expected operating losses that significantly affect DMH's debt service coverage metrics.
--Material decline in unrestricted balance sheet reserves.
SECURITY: Bonds are secured by the general revenues and gross receipts of the hospital.
CREDIT SUMMARY:
DMH operates 280 acute-care beds and 54 long-term care beds in Decatur, IL (approximately 123 miles northeast of St. Louis and 177 miles southwest of Chicago). DMH is the sole obligor on bonds and comprises 93.5% of total assets and 98.3% of total revenues for its parent company, DMH Health System. In fiscal 2010, DMH Health System had total revenue of $291.1 million.
The Outlook revision to Negative is primarily due to DMH's poor operating performance that is worsening through six-months 2011. In fiscal 2010, DMH recorded a loss from operations of $524,000 (negative 0.2% margin) and lost $2.3 million through March 2011 (negative 1.6% margin). During fiscal 2010, DMH's main competitor, St. Mary's, decided to employ the largest cardiology group in town. Therefore, since the beginning of 2010, profitability declines have been a result of the loss of the cardiac volume. DMH is in process of recruiting for the cardiology service line and has recruited a total of two to date. Management expects the full impact of the loss cardiac volume to be realized by the end of fiscal 2011, with a projected loss of $3 - $5 million for the full fiscal year. The total dollar impact from the loss cardiac volume is approximately $11 million a year.
Other areas of pressure on profitability include a high exposure to governmental payors comprising approximately 59.5% of total gross revenues. Specifically, Medicaid makes up 13.2% in 2011, which is on an increasing trend, consecutively, over the past four fiscal years. The City of Decatur's population continues to decline, while unemployment remains high at 9.7%. Volume has been trending negatively over the past four fiscal years with inpatient admissions and clinic visits declining to 10,050 and 283,131 in 2010 from 12,836 and 313,469, respectively. Lastly, DMH's bad debt expenses in 2010 increased significantly from prior year jumping to 9.7% of total revenues from 6.5% in 2009.
DMH's primary credit strengths include its strong balance sheet and moderate debt burden. As of March 31, 2011, DMH had $183.9 million in unrestricted cash and investments, which translated into 272.6 days cash on hand, 23.8x cushion ratio, and 293.2% cash to debt. These metrics compare very favorably against Fitch's 'A' category medians of 183.8 days, 14.4x, and 105.5%. DMH has $70.3 million of debt outstanding, which management expects to reduce by the end of calendar year 2011. A significant reduction in debt would be viewed favorably by Fitch in light of DMH's many operational challenges.
Disclosure: DMH covenants to disclose annual and quarterly financial statements to the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 20, 2011);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (Dec. 29, 2009).
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
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