CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to the expected issuance of:
-- $48.9 million Burleigh County North Dakota health care revenue refunding bonds, series 2013A (St. Alexius Medical Center Project).
In addition, Fitch affirms the 'A-' rating on the following revenue bonds issued on behalf of St. Alexius Medical Center (St. Alexius):
--$40.6 million Burleigh County North Dakota health care revs, series 2012A;
--$13.5 million City of Bismarck health care revs, series 1998A*;
*To be refunded from the proceeds of the series 2013A issue
The series 2013A issue is expected to be structured as fixed-rate bonds. Proceeds will be used to refund the series 1998A bonds, reimburse the corporation for prior capital expenditures as well as fund future capital spending and pay related costs of issuance. The series 2013A bonds are expected to be priced the week of June 3 through negotiated sale.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by the Pledged Revenues of St. Alexius.
KEY RATING DRIVERS
SOLID PROFITABILITY: Over the last four years, St. Alexius has generated very stable and consistent operating and operating EBITDA margins that are in line with Fitch's 'A' category medians. However, profitability has declined in 2013 due, in part, to rising uninsured costs, and expenses related to physician recruitment.
POSITIVE SERVICE AREA DEMOGRAPHICS: Contrary to national trends, the North Dakota economy enjoys growing wages, low unemployment, and a growing population resulting from rising agricultural and energy prices. The development of the large oil and gas formation in the western part of the state is causing a sharp increase in population and business activity in St. Alexius' service area.
LOW LIQUIDITY POSITION: Historically, St. Alexius has maintained a light liquidity position as its funded capital investments from operations. As a result, historical liquidity metrics have been weak compared to Fitch's 'A' category medians and peers. Upon closing of the series 2013 issue, St. Alexius' liquidity position will improve as the corporation reimburses itself for prior capital expenditures and funds future capital spending. Financial projections indicate further growth in liquidity despite capital spending plans.
LEADING MARKET SHARE POSITION: St. Alexius has increased its leading market share position (50.5% vs. 44.2%) in its primary service area over its primary competitor, Sanford Bismarck Hospital (fka MedCenter One), which became part of Sanford Health System in June 2012. Historically, market share positions have been very stable and the two organizations have collaborated on certain shared services. Fitch will monitor if ownership change alters the historical collaborative relationship.
RATING SENSITIVITIES
IMPACTS OF POPULATION GROWTH: While the strong economy and growing service area population are seen as long-term positive credit factors, the need to issue additional debt to fund facilities expansion to meet a sharp growth in population would likely result in negative rating pressure given St. Alexius' historically low liquidity and recent decline in operating cash flow.
DETERORIATION IN FINANCIAL PROFILE: Sustained compression of profitability or failure to continue to build liquidity would likely result in negative rating pressure.
CREDIT PROFILE
St Alexius Medical Center includes the 306-licensed bed (281 staffed) St. Alexius Medical Center in Bismarck, North Dakota; 22-bed Garrison Memorial Hospital (Critical Access) in Garrison, ND (approximately 75 miles north of Bismarck) and 25-bed Community Memorial Hospital (Critical Access) in Turtle Lake, ND (approximately 61 miles north of Bismarck). On a consolidated basis, St Alexius had total revenues of $285.3 million in fiscal 2012 (year ending June 30).
The 'A-' rating reflects St Alexius' stable and consistent operating profitability, low leverage and solid debt service coverage, stable market share position and positive service area demographics. The corporation's historically weak liquidity metrics will improve as a result of the series 2013 plan of finance.
St Alexius' operating performance over the last four fiscal years has been very stable with slight year-over-year improvement in operating profitability. St. Alexius has posted operating margins of 3.5% or 3.6% in each year since 2009, which exceeds the 'A' category medians over that time period. Operating EBITDA margin has improved incrementally each year from 9.6% in fiscal 2009 to 10.9% in fiscal 2012. However, profitability through the 10 months ended April 30 has compressed, with operating and operating EBITDA margins of 0.4% and 8.5%, respectively. Management attributes the weaker performance to softer-than-expected outpatient volumes and surgeries, investment in physician recruitment, and higher bad debt related to growing self-pay volumes. Management has implemented various initiatives which should generate improved operating performance for 2013.
While the series 2013 issue will increase St Alexius' leverage position, debt burden remains modest which, combined with solid profitability results in solid historical coverage of pro-forma maximum annual debt service (MADS). Pro-forma debt-to- capitalization at April 30, 2013 is roughly 38.0%, which is an increase from 28.2% currently but still compares favorably to the 'A' category median of 41.9%. For purposes of analysis, Fitch is using pro-forma MADS of $7.02 million which equates to a light 2.1% of fiscal 2012 total revenues. Historical coverage of pro-forma MADS by EBITDA in 2011 and 2012 was a solid 4.8x and 5.6x, respectively. However, MADS is very conservative as St Alexius' debt service is front-loaded with pro-forma MADS occurring in 2014. Average annual debt service from 2013-2023 is approximately $6.1 million per year.
Fitch views the service area demographics positively. The North Dakota economy has benefited from rising agricultural prices and the development of the large oil and gas formation in the western part of the state. The state enjoys low unemployment rates, strong wage growth, and growing population. From 2000-2010, the population in Burleigh County grew by 17.1% and the continued development of energy resources is expected to result in strong population growth in St. Alexius' service area. While the strong economy and growing service area population are seen as long-term positives, a sharp growth in population that requires issuance of additional debt to fund facilities or a sharp rise in uninsured or self-pay patients that erodes profitability does present some risk. The ambulatory care center financing in Minot referenced in Fitch's prior rating action commentary (dated Jan. 10, 2012, available at www.fitchratings.com) ($25 million through non-obligated affiliate) is now on hold. Capital spending is estimated at $25 million in 2013 and $43 million in 2014 and includes approximately $40 million of expenditures associated with the Epic implementation over the next two to three years.
Fitch identified St Alexius' weak liquidity metrics as a primary credit concern in its January 2012 rating action commentary. Upon closing of the series 2013 issue, St. Alexius' liquidity position will improve as the corporation reimburses itself for prior capital expenditures and funds future capital spending. At April 30, 2013, unrestricted cash and investments equaled $58.9 million which equates to 77.0 days cash on hand, an 8.4x cushion ratio (based on pro-forma MADS) and 92.4% cash-to-long-term debt.; all of which are weaker than the respective 'A' category medians of 191.0, 16.3x and 116.4%. With the reimbursement of prior capital expenditures ($35 million increase in cash and investments), St Alexius' days cash on hand, cushion ratio and cash-to-debt metrics would improve to 122.8, 13.4x and 94.7% at April 30.
Historically, St. Alexius and its primary competitor, Sanford Bismarck, have maintained very stable market share positions. St. Alexius increased its leading market share position in the primary service area in 2012 to 50.5% from 49.0% while Sanford Bismarck Hospital's market share decreased to 44.2% from 46.1%. In July 2012, MedCenter One was acquired by Sanford Health System and has been renamed Sanford Bismarck Hospital. Historically, both organizations have collaborated on certain shared services. However, the change in ownership presents some uncertainty regarding future collaborative efforts.
The Stable Rating Outlook reflects Fitch's expectation that St Alexius can successfully deliver services to a growing population and maintain its stable and consistent operating performance. Additional debt to fund expansion could pressure the rating but would be determined by the size, strategic value and benefit of the specific project.
Disclosure
Under its Continuing Disclosure Agreement, St Alexius has covenanted to provide annual and quarterly disclosure through the Municipal Rule Making Board's EMMA system. The content of St Alexius' disclosure includes utilization statistics, balance sheet and income statement.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated July 20, 2012.
For information on Build America Bonds, visit Fitch's website at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791592
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