SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on Mississippi Baptist Health System (MBHS) as part of its continuous surveillance effort:
--$110.4 million Mississippi Hospital Equipment and Facilities Authority revenue bonds, series 2007A, affirmed at 'BBB+'.
The Rating Outlook is Stable.
RATING RATIONALE:
--Profitability, while still weak, continues to rebound as operating losses were lower in FY 2010 than the prior year and MBHS reported positive income from operations through the six-month interim period. Management undertook strategic cost reduction and revenue enhancement measures, as well as implemented key initiatives to enhance patient utilization and labor productivity.
--MBHS liquidity is very good as balance sheet metrics well exceed Fitch's 'BBB' category medians. Fitch believes that MBHS' strong liquidity supports the current rating and mitigates an otherwise weak profitability.
--Patient utilization is also rebounding, reflecting management's investments in key specialty service lines, along with an expansion in MBHS' ambulatory network and ancillary services.
--The central Mississippi healthcare marketplace is very competitive with the presence of four major providers.
--Moderately high debt position with 4.1% maximum annual debt service (MADS) as a percent of revenue and 40.9% debt to capitalization in FY 2010.
KEY RATING DRIVERS:
--Maintenance of balance sheet strength.
--A return to historical profitability.
SECURITY:
The bonds are secured by a gross revenue pledge and a debt service reserve fund.
CREDIT SUMMARY:
The 'BBB+' rating affirmation reflects improving profitability since Fitch's last rating action in May 2010, excellent liquidity, and a moderately-high debt burden. Credit concerns include MBHS' ability to maintain liquidity and buttress profitability despite heavy capital spending plans and a highly competitive service area.
Since Fitch's last rating review, management's turnaround initiatives led to a healthy reduction in operating losses as MBHS reported an operating loss of $4.1 million in FY 2010, compared to $7.1 million in the prior year. Further, through the six-month interim period ending Feb. 28, 2011, MBHS posted $1.4 million in income from operations, compared to a loss of $10.9 million in the prior year period. The continued improvement is related to stronger patient revenue growth as patient volume improved due to MBHS investments in key specialty, ambulatory, and ancillary service lines. In addition, FY 2010 included a one time increase in disproportionate share (DSH) payments of approximately $10 million out of a total of $23.2 million from supplemental funds. Management continues its cost control and revenue cycle efforts, along with productivity enhancement initiatives. Management projects to end FY 2011 with a modest $2.2 million in operating income as it expects operating traction of its efforts and investments. Supplemental funds are expected to total $11.6 million for fiscal 2011 and between $8-9 million in future years.
Patient volumes improved since 2009 largely due to MBHS' investments in and expansions of its cardiology, orthopedics, and neuroscience service lines. Key utilization indicators through the interim period are tracking above prior year and budget, especially admissions, surgeries, and outpatient visits.
Liquidity remains MBHS' key credit strength. As of Feb. 28, 2011, MBHS had $239.5 million in unrestricted cash and investments that amounted to 252.5 days cash on hand and 113.9% cash to debt position. These ratios far exceed Fitch's respective 'BBB' category medians of 122.2 days and 75.9%. The debt position is moderately high, with 4.1% MADS as a percent of revenue and 5.7 times (x) debt to EBITDA in FY 2010, which are weak relative to Fitch's 'BBB' medians of 3.5% and 4.5x, respectively. Capital spending plans are somewhat high and are expected to average $39.5 million over the next five fiscal years. MBHS will be challenged to support this level of capital spending without improving operating earnings. While capital spending plans can be constrained based on cash flow trends, Fitch believes that the competitive market may limit MBHS' flexibility.
Fitch's main credit concern is the highly competitive market in central Mississippi. MBHS' operating losses were driven by the loss of cardiac volume when its main cardiac physicians were recruited by one of its main competitors. Recent market share data was not available and the latest data (FY 2008) indicated that MBHS secures about 21% of the inpatient market in its three county primary service area. Other competitors include St. Dominic Health Services (23% market share), University of Mississippi Medical Center (19% market share), and Health Management Associates (5 hospitals) with 32% market share.
As of Feb. 28, 2011, MBHS had $204.4 million in long-term debt outstanding. MBHS' capital structure consists of the series 2007A which are in fixed rate mode; an $80 million variable rate bank qualified series 2009 bonds, and a $14 million variable rate bank loan. MBHS has a fixed payor swap associated with the 2009 bonds, with a current mark to market value of negative $12,371,897 as of May 31, 2011.
The Stable Outlook reflects Fitch's expectation that operating performance will continue to improve due to its revenue growth and expense reduction initiatives. In addition, it is imperative that MBHS maintains its balance sheet strength to offset its weak profitability and competitive market.
MBHS main line of business is a 435 staffed-bed hospital in Jackson, MS. Total revenues in FY 2010 were about $379 million. MBHS provides quarterly and annual utilization and financial statements to the Municipal Securities Rulemaking Board's EMMA system. MBHS also includes a quarterly management discussion and analysis, which Fitch views positively.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria,' dated Oct. 8, 2010;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009.
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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