NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating on $133,960,000 of series 2009A revenue bonds issued by the Delaware Health Facilities Authority on behalf of Bayhealth Medical Center (Bayhealth).
The Rating Outlook is Stable.
Bayhealth also has $69,490,000 outstanding in series 2012 direct purchase bonds with PNC Bank, which Fitch does not rate.
SECURITY
The bonds are secured by a pledge of gross revenues and a mortgage on the hospital facilities.
KEY RATING DRIVERS
EXCELLENT FINANCIAL PROFILE: Bayhealth's overall financial profile is characterized by strong liquidity, profitability, and debt metrics, with most key ratios exceeding the 'AA' medians. Robust profitability producing solid cash flow has led to balance sheet strengthening over the last several fiscal years.
DOMINANT MARKET POSITION: As a sole acute care hospital in its county, Bayhealth maintains a dominant position in its primary service area, with stable market share around 80%.
SIGNIFICANT CAPITAL PROJECTS: A multi-year, phased facilities expansion project is underway, with two of three phases complete. Kent General Hospital campus was fully updated in the first two phases, and a replacement facility for Milford Memorial Hospital will be constructed in the third phase beginning in 2015.
RATING SENSITIVITIES
STABILITY EXPECTED: Overall operating and financial stability is expected to be maintained in the foreseeable future, supported by Bayhealth's strong market position.
ONGOING CONSTRUCTION PROJECT: Phase III of the master facility plan is budgeted at $200 million, which will be spent over three years. Fitch will evaluate the financial impact of the project once details are provided.
CREDIT PROFILE
Headquartered in Dover, Delaware's state capital, Bayhealth is a two-hospital system that consists of Kent General Hospital (206-staffed beds) and Milford Memorial Hospital (108-staffed beds). Total revenue in the fiscal year ended (FYE) June 30, 2013 was $476.3 million (unaudited interim financials).
DOMINANT AND STABLE MARKET POSITION
Bayhealth's inpatient market share has been maintained at around 80% and is supported by continued growth of clinical services lines, which include cardiac surgery through an affiliation agreement with University of Pennsylvania's Penn Cardiac Care, and enhanced oncology services through an affiliation agreement with the Penn Cancer Network. The collaborative competitive environment in Delaware has also been advantageous to Bayhealth.
ROBUST PROFITABILITY
Profitability in fiscal 2012 and 2013 were strong and considerably above budget, albeit lower compared to prior years due to heightened depreciation expense. Operating margins of 8.5% in 2012 and 6.5% in 2013 and operating EBITDA margins of 15% and 14.2% exceeded Fitch's respective medians of 4.2% and 11.8%. Given the strong market position, new Kent General Hospital facility, and service line growth, Fitch expects Bayhealth to manage rising expenses driven by increasing employed physicians base and IT and capital expenditures, and continue generating profitability metrics well in excess of the medians.
ONGOING CONSTRUCTION PROJECTS
A multi-year, phased hospital facilities expansion project continues. Phase I was completed in 2005 and added four floors to Kent General Hospital. Phase II, also at Kent General Hospital, added three floors to the existing patient tower, doubled the capacity of the emergency department to 30 bays, and expanded parking space. Major construction projects at Kent General Hospital are now complete, with the facilities fully opened in January 2012. Management reports that the hospital is operating at capacity, and is receiving increased satisfaction results. Total cost of the project was approximately $150 million, funded by a combination of debt and equity. There is also shelled space for medical/surgical units, which would cost approximately $12 million-$15 million to fill.
Planning for Phase III is underway, to build a 150-bed replacement facility for Milford Memorial Hospital. The project is estimated to cost $200 million, with construction taking place over three years beginning in 2015. Bayhealth is contemplating the use of debt and/or equity to finance the project. Fitch will evaluate the impact of any new debt or significant cash spend once details are provided, but notes that there is some capacity at this rating level. Capital spending for fiscal 2014 is expected to be lower, with $22.7 million budgeted.
SOLID LIQUIDITY
Unrestricted cash and investments increased to $446.2 million at FYE 2013 from $373.2 million at FYE 2011, bolstered by strong cash flows. Days cash on hand of 390.8, 34.8x cushion ratio, and 215.7% cash to debt compare very well against the 'AA' medians of 254.3 days, 23.4x, and 173.6%. Further growth in liquidity is expected in fiscal 2014, which should augment Bayhealth's ability to spend cash reserves for the Milford Memorial Hospital project.
MODERATING DEBT BURDEN
At June 30, 2013, Bayhealth had $206.9 million in long-term debt outstanding, consisting of the series 2009A fixed rate bonds and series 2012 direct purchase bonds with PNC Bank. The series 2012 bonds were issued in June 2012 and bears interest at a variable rate, with an initial term extending to July 1, 2019. Proceeds were used to refund the series 2009B and 2009C variable rate demand bonds supported by letters of credit. Overall debt structure is relatively conservative with 66% fixed rate bonds and 34% variable rate bonds. Bayhealth has one swap outstanding with a mark to market of negative $2.7 million at FYE 2013.
Debt metrics have improved significantly from its high in fiscal 2010, when the series 2009 bonds were issued. MADS coverage by EBITDA of 7.8x in 2012 and 6.4x in 2013 are solid compared to the median of 5.0x. Leverage metrics are consistent with the rating, with MADS as a percentage of revenue of 2.7% and debt to capitalization of 29.3% in 2013 compared to the respective medians of 2.6% and 32.7%, and 3.4% and 41.7% in fiscal 2010.
DISCLOSURE
Bayhealth has covenanted to provide bondholders with audited financial statements within 150 days of year-end and quarterly disclosure within 60 days of quarter-end. Disclosure includes a management discussion and analysis, balance sheet, income and cash flow statements, and utilization statistics.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 3, 2013;
--'U.S. 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=802181
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