CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the following bonds expected to be issued by the Maryland Health and Higher Educational Facilities Authority (the authority) on behalf of Calvert Health System (CHS):
--$30,755,000 revenue bonds series 2013.
In addition, Fitch has affirmed the 'A' rating on the following bonds issued by the authority on behalf of CHS:
--$32,535,000 revenue bonds series 2004.
The Rating Outlook is Stable.
Proceeds of the series 2013 bonds will be used to refund the outstanding series 2004 bonds and to pay costs of issuance. Refunding sources include the release of a $3.2 million related debt service reserve fund, thereby decreasing pro forma total debt outstanding. Pro forma maximum annual debt service (MADS) is expected to equal $3.6 million and was provided by the underwriter. The bonds are expected to sell the week of Aug. 5 via negotiation.
SECURITY
The bonds are secured by a pledge of the receipts of the obligated group.
KEY RATING DRIVERS:
STRONG MARKET POSITION: CHS holds a dominant market position in a favorable primary service area (PSA). Additionally, CHS bolsters its market position through partnerships with several tertiary providers in certain service lines.
SOLID LIQUIDITY METRICS: Liquidity metrics exceed the 'A' category medians with 244.2 days cash on hand, 23.1 times (x) cushion ratio and 145.5% cash to debt at April 30, 2013. Liquidity is expected to be further bolstered from the expected sale of six medical office buildings (MOBs) in August 2013.
IMPROVING OPERATING PERFORMANCE: Operating performance has improved each year since fiscal 2010 with operating EBITDA margin increasing from 7.4% to 11% in fiscal 2012. The improvement reflects incentive payments received in fiscal years 2011 and 2012 for participating in Maryland's Total Payment Reimbursement (TPR) program, operating adjustments necessary to operating under the TPR system and reduced employed physician losses.
SMALL OPERATING PLATFORM: With a small revenue base of $134.3 million in fiscal 2012, CHS is significantly smaller than Fitch's 'A' category peers, exposing CHS to increased sensitivity to physician turnover and non-recurring items. CHS will need to maintain higher profitability and liquidity metrics to offset the potential volatility.
RATING SENSITIVITIES
STABLE OPERATING PERFORMANCE: Fitch expects operating profitability to stabilize during the second term of the TPR program at levels which will continue to provide solid MADS coverage.
CREDIT SUMMARY:
Located in Prince Frederick, MD (approximately 41 miles southeast of Washington, DC) CHS operates a general acute care hospital with 122 acute care beds (92 currently licensed), 18 skilled nursing beds, 12 nursing beds and various outpatient facilities. Operating revenue equaled $134.3 million in Fiscal 2012.
CHS is one of 10 Maryland hospitals participating in the TPR program. TPR was developed for Maryland's sole community hospitals and provides a fixed, fully-capitated, revenue stream which is adjusted annually based upon historical volume and demographic trends.
Fitch views CHS' participation in the TPR program positively as it should position CHS well for the implementation of health care reform and operating in a value based reimbursement environment. CHS anticipates executing a three-year extension through 2016 which should provide a measure of operating stability as over 90% of operating revenues will be known in advance and expenses can be managed as appropriate.
STRONG MARKET POSITION
CHS' dominant market share of over 70% in its county is expected to create further credit stability. The county accounts for over 75% of discharges and is characterized by low unemployment and above average wealth levels relative to both Maryland and national levels. CHS benefits from limited competition with its closest competitor being 26 miles away. However, given CHS' proximity to Baltimore and Washington, D.C., outmigration is a credit concern.
SOLID LIQUIDITY METRICS
Unrestricted cash and investments increased 17.2% from $71.6 million at fiscal year-end 2011 to $84 million at April 30, 2013 primarily due to investment returns. With 244.2 days cash on hand, 23.1x cushion ratio and 145.5% cash to debt, liquidity metrics are strong relative to Fitch's 'A' category medians of 191 days, 16.3x and 116.4%. Capital plans are expected to be moderate and are not expected to negatively impact liquidity metrics. Liquidity metrics should be further bolstered by the expected sale of six MOBs which is expected to be completed in August 2013.
IMPROVING OPERATING PERFORMANCE
Operating profitability has improved each year since fiscal 2010 when CHS posted a negative 2.7% operating margin with positive operating margins of 0.8% and 1.9% in fiscal years 2011 and 2012, respectively. Fitch notes that the operating loss in fiscal 2010 was largely due to non-recurring items. However, profitability in fiscal years 2011 and 2012 was bolstered by incentive payments for participating in the TPR program of $5.5 million and $1.8 million, respectively, which are a permanent part of CHS' TPR cap amount. Operations continued at increased levels through the 10 month interim period ending April 30, 2013 with CHS posting an operating margin of 1.5%. Improved operations reflect CHS' adjustment to operating within the TPR system and effective cost management with a particular emphasis on labor productivity.
Operations have provided for solid debt service coverage. Pro forma MADS coverage by EBITDA of 4.6x in fiscal 2012 and 4.3x in the interim period exceed Fitch's 'A' category median of 4.1x. While exceeding Fitch's 'A' category median, coverage metrics are consistent with similarly sized 'A' category peers. CHS expects to use a portion of the proceeds from the MOB sale to pay off a $6.8 million guaranteed term loan in August 2012 which should decrease MADS by approximately $300,000 and strengthen coverage.
SMALL OPERATING BASE
Hospitals with smaller revenue bases and medical staff are typically more vulnerable to physician turnover and other changes in operations than larger hospitals. Therefore, Fitch expects maintenance of higher profitability and liquidity metrics to offset the potential volatility.
The small revenue base is partially mitigated by the TPR program and CHS' affiliation agreements to supplement its clinical capabilities and to enhance the availability of specialists in Calvert County with organizations such as Johns Hopkins Health (rated 'AA-' by Fitch), Georgetown University Medical Center and University of Maryland Medical System (rated 'A' by Fitch). Fitch views CHS' affiliation strategy positively.
DISCLOSURE
Calvert covenants to provide quarterly and annual disclosure. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 3, 2013;
--'Nonprofit Hospitals and Health Systems Rating Criteria', May 20, 2013.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=797644
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