NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'BBB+' rating on the following bonds issued on behalf of Wellmont Health System (Wellmont):
--$76,165,000 The Health, Educational and Housing Facilities Board of the County of Sullivan, Tennessee hospital revenue refunding bonds (Wellmont Health System Project), series 2011;
--$55,000,000 Virginia Small Business Financing Authority hospital revenue bonds, series 2007A (Wellmont Health System Project);
--$200,000,000 The Health, Educational, and Housing Facilities Board of the County of Sullivan, Tennessee hospital revenue bonds, series 2006C (Wellmont Health System Project);
--$59,580,000 The Health, Educational and Housing Facilities Board of the County of Sullivan, TN hospital revenue refunding bonds, series 2005 (Wellmont Health System Project);
--$33,035,000 The Health, Educational and Housing Facilities Board of the County of Sullivan, TN hospital revenue refunding bonds, series 2003 (Wellmont Health System Project).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by gross receipts and mortgage pledge of the obligated group (OG). A fully funded debt service fund provides additional security. In addition, there is a liquidity covenant.
KEY RATING DRIVERS:
STRONG OPERATING EBITDA: Wellmont's operating EBITDA is consistently above Fitch's 'BBB' category medians, averaging 11.2% over the past four audited years and at 10.2% in the six month fiscal 2013 (June 30 year end) interim period.
CATEGORY CONSISTENT METRICS: Most of Wellmont's financial and capital metrics are consistent with the rating category, with liquidity strengthening over the last four audited years to above category medians.
LEADING MARKET SHARE: Wellmont maintains leading 55% inpatient market share in its defined primary service area. Although its market share has declined slightly in the past few years, it is not a credit concern.
ELEVATED DEBT BURDEN: Maximum annual debt service (MADS) as a percentage of revenue is high at 5.3% in the six month interim period relative to a Fitch's 'BBB' median of 3.3%. Wellmont is drawing down a $42.5 million loan ($3.1 million has been drawn to date) as part of its EPIC implementation (a separate $12.5 million was closed and drawn upon last year for a total of $55 million in additional debt for EPIC), all of which is factored into the MADS figure. With no other additional debt anticipated, Fitch expects Wellmont's debt burden to moderate over next few years.
RATING SENSITIVITIES:
OPERATING PRESSURE: Like many hospitals, Wellmont has seen inpatient volumes decline as services have shifted to an outpatient setting, with Wellmont's operating performance slightly weaker in the six month interim due, in part, to the reduction in inpatient services. Wellmont's ability to adjust to this volume shift and maintain its operating performance is key to the current rating. A weakening of its operating EBITDA would be a credit concern, given Wellmont's elevated debt burden.
CREDIT PROFILE:
The 'BBB+' rating is supported by an overall financial profile consistent with Fitch's 'BBB' rating category medians and Wellmont's leading inpatient market share in its primary service area (PSA). Wellmont finished fiscal 2013 with a 2.8% operating margin and MADS coverage of 2.6x, both solid for the 'BBB' category.
Six month fiscal 2012 interim figures show the operating margin sliding to 1.1%, which is off Wellmont's budget. Wellmont is adjusting its budget and expects to improve operations over the second half of the year, helped by an additional $6.5 million in meaningful use funds.
Liquidity has strengthened materially over the last four years, with unrestricted cash and investments growing by approximately 45% over that time, and Wellmont's key liquidity ratios now exceeding Fitch's 'BBB' medians. At Dec. 31, 2012, Wellmont had cash and unrestricted investments of $395.6 million (excluding $38.4 million in illiquid investments), which equated to days cash on hand of 197.1, a pro forma cushion ratio of 9.5x, and pro forma cash to debt (assuming full draw down on $45 million loan - only $3.2 million has been drawn to date) of 76.1%.
Wellmont's debt burden remains elevated for the rating level, as represented by MADS as a percentage of revenue of 5.3% and debt-to-EBITDA of 4.6x, and debt to capitalization of 51.8% as of Dec. 31, 2012, all of which compare unfavorably to 'BBB' category medians. An additional credit concern is competitive service area with Mountain States Health Alliance (general revenue bonds rated 'BBB+'/Outlook Stable by Fitch) a formidable competitor.
The Stable Outlook reflects Fitch's belief that Wellmont will maintain a level of operating performance to support consistent debt service coverage. Capital expenditures over the next two to three years are expected to be reasonable at approximately $40 million to $50 million per year, excluding $100 million EPIC implementation.
Wellmont's debt portfolio is relatively conservative with approximately 12% of its $481 million of long-term debt in variable rate mode. However, Wellmont does have four swaps. Lehman is the counterparty for three of the swaps. There are no collateral posting requirements at the current rating level. The aggregate mark to market as of Dec. 31, 2012 was a negative $8.5 million.
Wellmont Health System (WHS) is a large regional health care system with seven acute hospitals (816 staffed beds) and other related entities located in northeastern TN and southwestern VA. Wellmont had approximately $790 million in total revenue in fiscal 2012. WHS covenants to provide audited financial statements to the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system (EMMA), as well as quarterly unaudited statements.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', July 23, 2012.
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=681015
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789190
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