CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on the following Hancock County, Ohio bonds issued on behalf of Blanchard Valley Regional Medical Center (d/b/a Blanchard Valley Health System, BVHS):
--$105.6 million hospital facility revenue bonds, series 2011A.
The Rating Outlook is Stable.
Total debt includes approximately $43.7 million in bank qualified variable rate notes placed with Fifth Third Bank, which Fitch does not rate.
SECURITY
The bonds are secured by a pledge of gross receipts of the
obligated group, debt service reserve fund, and mortgage lien.
KEY RATING DRIVERS
STRONG OPERATING CASH FLOW: The 'A' rating is supported by BVHS' strong and consistent operating profitability. Over the last three years (2010-2012), BVHS has generated operating margins between 9.2% and 10.8% and operating EBITDA margins between 16.8% and 18.5%. Through the nine-month interim period ended Sept. 30, BVHS posted operating and operating EBITDA margins of 6.1% and 14.3%, respectively.
STRENGTHENING LIQUIDITY: At Sept. 30, 2013 BVHS had $261.9 million in unrestricted cash and investments, equating to 405 days cash on hand (DCOH), a 20.3 times (x) cushion ratio, and 170% cash to debt, exceeding Fitch's respective 'A' category medians of 196.3 DCOH, 15.6x cushion ratio and 129.2% cash to debt. Liquidity growth reflects BVHS strong cash flow, modest capital spending, excellent revenue cycle management, and good investment returns.
LEADING MARKET POSITION: BVHS maintains a stable and leading market position within its primary service area, evidenced by 74.6% market share through September 2013. BVHS maintains a strong and collaborative relationship with local employers and payors and has benefited from an affiliation with Nationwide Children's for certain pediatric services.
ELEVATED DEBT BURDEN: BVHS' debt burden remains elevated for the rating category. While debt to capitalization has moderated to 38.6% in the interim period from 44.6% at 2012 year-end, MADS as a percent of revenue remains high at 4.8% through the nine-month interim period.
LIMITED OPERATING SCALE: BVHS' limited geographic reach within Ohio and small revenue size for the rating category make it more susceptible to shifts in payor mix, clinical volumes, or physician complement. These risks are somewhat mitigated by the generally favorable economic characteristics of the service area, and BVHS' demonstrated ability to recruit and retain clinicians.
RATING SENSITIVITIES
MODERATING DEBT BURDEN: Fitch expects leverage metrics to moderate as BVHS has no plans to issue long-term debt. A moderation in debt burden combined with sustained operating profitability and further improvement in liquidity could result in upward rating movement.
CREDIT PROFILE
BVHS is a health system based in Findlay, OH
approximately 54 miles south of Toledo. BVHS maintains two acute care
hospitals including a 150-bed facility in Findlay and a 25-bed facility
20 miles southwest in Bluffton, a multi-specialty medical group,
retirement communities, a foundation, and several other affiliates.
Total operating revenue was $261.1 million in 2012 (Dec. 31 year end).
STRONG OPERATING CASH FLOW
The 'A' rating is supported by BVHS'
strong historical operating profitability which has generated balance
sheet growth and solid debt service coverage. Operating performance in
2012 and through the interim period reflects solid expense controls and
improved clinical volumes, due in part to its affiliation with
Nationwide Children's in 2013. Through the nine-month interim (Sept. 30,
2013), BVHS held total expense growth to 4.9% compared to a 6.8% growth
in net patient service revenue. BVHS is budgeting for a 7.1% operating
margin and 15.7% operating EBITDA margin for 2014, which is consistent
with current results.
STRENGTHENING LIQUIDITY
BVHS's unrestricted cash and investments
has grown 35% fiscal year end 2011 from $193.6 million to $262 million
at Sept. 30, 2013. BVHS' liquidity level provides ample cushion against
its somewhat small revenue base and risk associated with its debt
structure, which includes more than 30% variable rate debt.
LEADING MARKET POSITION
Compared to the prior year, BVHS grew its
inpatient and delivery volumes through the nine-month interim period
ending Sept. 30, 2013, despite an overall decline in total market
discharges for that same timeframe. This increase in volumes is driven
in large part by the closing of a competing obstetric service at
Fostoria Hospital (its nearest competitor). Volume growth has also been
supported by the addition of specialty physicians, as well as work with
medical staff to better document and support medically necessary
inpatient stays rather than observation stays.
ELEVATED DEBT BURDEN
Despite BVHS' strong profitability, MADS
($12.9 million) coverage by operating EBITDA was 3.5x in 2012, compared
to Fitch's 'A' category median of 3.4x. Through the nine-month interim
period, however, MADS coverage by operating EBITDA fell slightly to
3.0x. Through 2014 Fitch expects that continued strong operating cash
flow should result in moderation of BVHS debt metrics to levels more
consistent with the rating category.
BVHS expects to maintain a moderate level of capital spending financed with cash flow over the medium term, estimated at roughly $27 million during 2014 and declining to approximately $18 million thereafter. BVHS has no significant debt plans for the next 12 to 24 months.
BVHS has a variable-to-fixed rate swap in place, with a negative mark-to-market of -$18.7 million as of Jan. 7, 2014. The swap insurance provided by Assured Guaranty expires in April 2014, which will require BVHS to post collateral of approximately $8.7 million against a $10 million threshold. The swap no longer qualifies for hedge accounting, though it effectively offsets BVHS's variable rate direct placement debt.
DISCLOSURE
BVHS covenants to disclose audited and quarterly results
to the Municipal Securities Rulemaking Board's EMMA system. Disclosure
includes management discussion & analysis, which Fitch believes is best
practice. Disclosure has been timely and thorough, and management has
been very accessible to Fitch.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Nonprofit Hospitals
and Health Systems Rating Criteria', dated May 20, 2013.
Applicable Criteria and Related Research:
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=821044
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