NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued by Montgomery County Higher Education and Health Authority on behalf of Holy Redeemer Health System (HRHS).
--$54 million series 1997A;
--$29.6 million series 2006A.
The Rating Outlook is Stable.
SECURITY:
Debt payments are secured by a pledge of the gross receipts of the obligated group.
KEY RATING DRIVERS
PROFITABILITY DECLINE: Decline in inpatient volumes at Holy Redeemer Hospital (HRH), increased expense of physician alignment, and utilization of some of the long term care, home care and hospice divisions below budgeted levels continues to stress profitability with the system reporting a $2.9 million operating loss for the nine-month interim period ended March 31, 2013.
SOLID LIQUIDITY MAINTAINED: The decline in operating results is partially offset by HRHS's very good liquidity metrics with 177 days cash on hand (DCOH), 10.6 times (x) cushion ratio, and 128% cash to debt, all stronger than the 'BBB' rating category medians.
REVENUE DIVERSIFICATION: The proposed 2012 partnership with Abington Hospital was not consummated, but the system is continuing to pursue strategic relationships. Its diversified service lines, which include acute care, long-term care, and home health, provide an attractive platform for population based health care delivery.
ELEVATED DEBT BURDEN: The system's debt burden is elevated with maximum annual debt service (MADS) equal to 4.4% of revenues, compared to the category median of 3.3%. HRHS's coverage of MADS by EBITDA of 2.1% through the nine-month interim period ended March 31, 2013 is lower than the category median of 2.8x. The obligated group, however, had much stronger debt service coverage of 3.6x in 2012 as per its bond covenant calculation and the system has minimal exposure to variable rate debt.
RATING SENSITIVITIES
NEED TO IMPROVE PROFITABILITY: While an operating loss may be budgeted for the next fiscal year, continued material operating losses with a negative impact on EBITDA debt service coverage, or deterioration of the solid liquidity position, may lead to downward rating pressure.
CREDIT PROFILE:
The affirmation of the 'BBB-' rating and the Stable Outlook is based on HRHS's solid liquidity position and revenue diversification, which serves to offset the weakening operating performance. Fitch's additional concerns include the competitive northeast Philadelphia service area for HRHMC, a somewhat elevated debt burden for the system, and high exposure to governmental payers related to the system's senior living component.
The system on a consolidated basis, which includes a number of non-obligated entities (the obligated group accounted for 88% of system revenues and 84% of system assets), HRHS recorded a small operating gain for the fiscal year ended June 30, 2012 of $0.7 million, equal to an operating margin of 0.2% and operating EBITDA margin of 7.6%, both lower than Fitch's 'BBB' rating category medians of 1.9% and 8.3%, respectively. Through the nine-month interim period ended March 31, 2013, the system reported a $2.9 million operating loss, for a negative operation margin of 1.1% and a negative EBITDA margin of 6.3%. The obligated group had a $3.1 million operating gain in fiscal 2012 and reported a $2.9 million operating loss for the 2013 interim period.
Among the reasons for the continuing operating challenges are the lower than budgeted revenues stemming from a decline in impatient volumes at HRHMC of 10.4% in 2012 and a 3.6% through the 2013 interim period. Further, lower than historical occupancy levels at the independent and assisted living units at the two long-term care facilities and lower than budgeted volumes in the some of the home care and hospice operations contributed to the weaker results. Management anticipates ending fiscal 2013 with a small operating gain of $0.2 million, falling short of budgeted $1 million in operating income.
Holy Redeemer Visiting Nurse Agency, Inc. (HRVNA), the Shore New Jersey homecare and hospice entity, was released from the obligated group on April 16, 2013 (all of the other system home agencies are also outside the obligated group). The removal of the HRVNA is not expected to have a material impact on the obligated group financial profile. Management is strongly committed to this line of business and expanded its home care and hospice presence through the July 2012 acquisition of VNA Home Care of Mercer County (annual revenues of approximately $9 million and over 40,000 home health visits and 10,000 hospice days), and the system now has home health/hospice presence in 11 counties in New Jersey and three in Pennsylvania. The addition of the Mercer VNA was already accretive to the home care division performance in this fiscal year, which had a $3.1 million net loss in 2012. The home care division is projected to end with a break even bottom in 2013, and is budgeted for a $1 million net gain by next year.
The system and Abington Hospital cancelled a proposed partnership in July of 2012. Management reports that there have not been any negative consequences from the failed partnership and Holy Redeemer is continuing to explore other strategic relationships. Fitch believes that the system's diversified platform, which includes long term, home and hospice care, has a strong appeal to providers and insurers seeking partners for population health care coverage. Pennsylvania Independence Blue Cross (IBC) also placed Holy Redeemer in its top tier of providers evaluated on the basis of quality and cost prior to the renegotiation of the IBC contract later this year.
Fitch's concern related to the decline in profitability is moderated by the system's solid liquidity metrics. At March 31, 2013, the system had $165.3 million of unrestricted cash and investments, translating to 177.4 DCOH, 10.6x cushion ratio, and cash equal to 127.9% of debt, all of which exceed the respective 'BBB' category medians of 138.9 days, 9.4x, and 82.7%. The system's investment portfolio has a relatively aggressive asset allocation with 30% in alternative investments and private equity. Offsetting this concern is the system's conservative debt structure with very small variable rate exposure (outside of the obligated group) and no exposure to derivatives.
The system generated coverage of MADS by EBITDA of 2.6x in fiscal 2012 and 2.1x through the nine-month interim period in 2013. The $15.6 million MADS includes debt outside of the obligated group and is particularly distorted by a $3.1 million payment at one of the CCRC's due in 2013, now reduced to $1.9 million and being paid off as units are being sold, as well as a $4.2 million bullet on a mortgage note due in 2015 which is expected to be refinanced. The obligated group had much stronger debt service coverage of 3.6x in 2012 as per its bond covenant calculation. The system executed a fixed-rate taxable loan with TD Bank, N.A. in 2011 in the amount of $23.4 million (not rated by Fitch) with a six-year term and covenants mirroring those in the system's existing master trust indenture.
The system is evaluating the potential of an issuance later this year to refund the series 1997 bonds, which may include new money. No decision has been made and the Fitch analysis does not include the impact of such an issuance.
HRHS's obligated group consists of Holy Redeemer Hospital and Medical Center (242 licensed-bed acute care hospital in Medowbrook, PA, and approximately 20 miles from downtown Philadelphia), two long-term care facilities and Home Care and Hospice in Pennsylvania, and HR Physician Services. In fiscal 2012, the consolidated system had $347.5 million of revenues; the obligated group accounted for approximately 88% of total system revenues and 84% of system assets. Fitch's analysis considers the consolidated audited financial statements which include both obligated and non-obligated group entities. HRHS covenants to provide audited annual financial statements within 120 days of each fiscal year end and quarterly disclosure within 60 days of each fiscal quarter end. Quarterly disclosure consists of management discussion, balance sheet, income statement, cash flow statement, and utilization statistics.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 3, 2013.
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=793272
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.