CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the rating on the following Hospital Authority No. 1 Gage County, Nebraska bonds, issued on behalf of Beatrice Community Hospital (BCH):
--$30 million health care facilities revenue bonds, series 2010B, to 'BB+' from 'BBB-'.
BCH also has $15 million in series 2010A bank qualified bonds, which are not rated by Fitch.
The Rating Outlook is Stable.
SECURITY
The bonds are supported by a pledge of revenues, mortgage, and debt service reserve.
KEY RATING DRIVERS
UNEXPECTED DECLINE IN LIQUIDITY: The downgrade to 'BB+' is driven by a significant and unexpected drop in BCH's liquidity position, which was the result of higher-than-anticipated cash outlays on capital projects and consulting fees. BCH's unrestricted cash and investments dropped significantly in fiscal 2012 to $8.9 million (78.2 days cash on hand (DCOH)) and was $9.2 million (73.3 DCOH) at Feb. 28, 2013. DCOH dropped further as of Feb. 28, 2013 despite an increase in absolute unrestricted liquidity due to increased operating expenses.
SIGNIFICANT DEBT BURDEN: BCH has a very large debt burden, which Fitch expects will moderate over time. Leverage metrics remained high through the Dec. 31, 2012 interim with debt to EBITDA of 4.7x and debt to capitalization of 55.9%, against Fitch's 'BBB' category medians of 4.2x and 49.1%, respectively. BCH has no further debt planned, and has limited capital needs going forward.
STRONG CASH FLOW: Good volume trends have supported healthier cash flow; BCH produced a 2.6% operating and 15.3% operating EBITDA margin in fiscal 2012 which was sufficient to provide 1.9x coverage of MADS. This trend is expected to continue as BCH grows into its new facility, maintains good volume trends, and receives better Medicare/Medicaid reimbursement as a result of its critical access hospital designation.
ENHANCED REIMBURSEMENT: BCH's operating performance continues to be bolstered by critical access hospital (CAH) designation. This helps to mitigate both the hospital's increased operating costs in its now completed replacement hospital and the risks inherent to small rural facilities.
STABLE MARKET POSITION: Its rural location affords BCH with stable and leading market share within its service area, including parts of Gage and Jefferson Counties. The competitive landscape is limited, and BCH benefits from a collaborative relationship with referral centers and physician groups in Lincoln. Further, successful recruitment and retention help offset that risk and have enabled BCH to produce good volume growth in fiscal 2012 and interim 2013.
SMALL REVENUE BASE: Given BCH's small revenue base ($47 million), its financial performance can be subject to wide fluctuations as evidenced in fiscal 2012. A stronger financial cushion in excess of the 'BBB' category median ratios would be expected before movement back to an investment grade rating level.
RATING SENSITIVITIES
BALANCE SHEET IMPROVEMENT: Fitch expects BCH will continue to produce healthy operating cash flow at a level which results in incremental balance sheet improvement and an overall moderation of its leverage. If meaningful balance sheet improvement does not occur, it could place further negative pressure on the rating.
CREDIT PROFILE
The rating downgrade to 'BB+' is primarily due to an unexpected decline in BCH's liquidity, to levels that no longer reflect an investment grade credit profile. Unrestricted cash and investments fell to $8.9 million in fiscal 2012 (Sept. 30 year end) from $17.2 million the prior year. The drop was due in large part to the $6.3 million equity contribution to its replacement project. While expected, the equity contribution was funded from cash as BCH's cash flow since 2010 did not meet original projections.
Fitch expects BCH to replenish its balance sheet, and BCH reported $9.2 million and 73.3 DCOH as of Feb. 28, 2013. However, BCH's balance sheet metrics are expected to remain below Fitch's 'BBB' category medians through fiscal 2014, and provide only limited cushion against a sizeable debt burden.
Fitch notes that BCH only narrowly met its liquidity covenant of 70 DCOH at fiscal year ended Sept. 30, 2012 with DCOH calculated at 78.4 per the MTI definition. Tested semiannually, BCH is expected to remain in compliance at the March 31, 2013 test date.
BCH remains heavily leveraged, and the rating incorporates Fitch's expectation that leverage should moderate over the longer term with solid operating performance. Strong cash flow in fiscal 2012 and through the five-month interim period ended Feb. 28, 2013 produced coverage of 1.9x and 3.1x, respectively. BCH's market position and its CAH designation should provide for some revenue stability over the medium term. However, Fitch notes that any change to the CAH program, while not anticipated, would have a material impact on BCH's rating.
The Stable Outlook is supported by Fitch's expectation that strong volume and profitability trends will continue in BCH's new facility, and allow it to rebuild its balance sheet over the next 12-24 months. BCH is budgeting for a 3.6% operating margin and $10.6 million (18.8%) in operating EBITDA for fiscal 2013, which would produce 2.9x coverage by same. Fitch notes that given BCH's weakened balance sheet flexibility, there will be limited room at the 'BB+' rating level for weaker-than-expected operating results.
BCH is located in Beatrice, Nebraska approximately 40 miles south of Lincoln, Nebraska. BCH is a critical access hospital operating 25 acute-care beds. Other entities include two HUD housing projects and a congregate living facility. Total revenues were $46.9 million in audited fiscal 2012. BCH only covenants to provide audited annual financial statements 150 days after the year-end close to bondholders via the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system (EMMA), which Fitch views negatively. However, BCH also provides voluntary quarterly disclosure to bondholders via EMMA. Disclosure to Fitch has been timely and thorough.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated July 23, 2012.
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418
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