CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on the following Kentucky Economic Development Finance Authority bonds, issued on behalf of Owensboro Medical Health System (dba Owensboro Health; Owensboro):
--$456.1 million series 2010A;
--$65.7 million series 2010B.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of revenues, a mortgage lien, and a debt service reserve fund.
KEY RATING DRIVERS
REPLACEMENT PROJECT COMPLETED: The rating affirmation at 'BBB+' reflects the successful completion of Owensboro's replacement hospital, medical office building, and electronic medical projects on time and below budget. Owensboro spent approximately $468 million out of the budgeted $480 million total cost for these projects. Going forward, Owensboro' capital needs will lighten significantly, allowing for incremental balance sheet replenishment and debt moderation.
VERY STRONG MARKET POSITION: Owensboro maintains a dominant market position, as demonstrated by a 90% inpatient share within Daviess County and leading share within adjacent counties in Kentucky and Indiana. The new facility should help support its physician recruitment efforts, as well as its pursuit of trauma designation, which would further cement its position as a regional referral center in central Kentucky.
BALANCE SHEET IMPACT: As expected, Owensboro' balance sheet was impacted by planned equity contributions during the current fiscal year (year ending May 30). At Nov. 30, 2013, unrestricted cash fell to $178.5 million from $219.7 million at fiscal year-end 2013 equating to very light 151.8 days cash on hand (DCOH) and 35.3% cash to debt when compared to Fitch's 'BBB' category medians of 144.7 DCOH and 91.7% cash to debt. Following the sale of a non-obligated asset in January 2014, cash improved to $204.7 million, equating to 173.9 DCOH and 40.8% cash to debt as of Jan. 30, 2014.
STEADY CASH FLOW: Owensboro generated operating EBITDA and EBITDA margins of 11.1% and 12.8%, respectively which is consistent with Fitch's expectations. Owensboro is projecting this cash flow level will remain stable through fiscal year end, May 30, 2014.
SIGNIFICANT DEBT BURDEN: Owensboro' debt burden and leverage metrics are high for the rating category. Despite solid profitability, coverage of maximum annual debt service (MADS) is very light at 1.3x by operating EBITDA and 1.5x by EBITDA through the six month interim period. Debt to capitalization of 60.1% at Nov. 30, 2013 is heavy compared to the 'BBB' category median of 49.1%. Fitch expects Owensboro's debt burden will moderate over time as capital spending requirement are light and profitability is expected to remain consistent with historical performance. No additional debt is planned.
RATING SENSITIVITIES
STABLE PROFITABILITY IS NECESSARY: Sustaining robust cash flow levels is critical in maintenance of the rating due to Owensboro's mixed liquidity metrics and heavy debt burden. Failure to sustain current cash flow levels would likely prompt negative rating pressure.
CREDIT PROFILE
Owensboro Health is a 447-licensed-bed health system located in Owensboro, KY, approximately 100 miles southwest of Louisville, KY. Total revenues for fiscal 2013 were $428.8 million (year ended May 31).
Fitch uses consolidated financial statements in its analysis. The obligated group (OG) includes Owensboro (corporate parent, operating acute facilities) and Owensboro Health Medical Group (OMHS; owned & employed physician groups and MOB's). In fiscal 2013, total assets and revenues of the OG were $1.02 billion and $418.8 million, respectively, or 100% of total assets and 98% of total revenues all of the consolidated organization.
Effective Jan. 1, 2014, Owensboro sold the operations of Kentucky Bioprocessing (KBP), a non-obligated subsidiary of the system. KBP represented a marginal 1.7% of consolidated assets and 1.4% of consolidated revenues of the Owensboro system in FY13, and the sale is expected to realize a net gain for Owensboro.
REPLACEMENT HOSPITAL COMPLETION
Owensboro completed its replacement hospital on time in February 2013, moving patients in June 2013, and spent $375.4 million out of $385 million budget. The associated medical office building was completed in June 2013 for $43.2 million, just below the revised budget of $46 million. Owensboro went live on its EPIC information technology conversion in April 2013, for a total of $49.7 million, very close to the $49.4 million budget.
The remaining Parrish Campus renovation is expected to be completed in December 2014, for a total cost of $38.3 million. Through Nov. 30, Owensboro had spent $2.4 million on this project, and management reported in February that they are still on time and within budget. For fiscal 2014 and beyond, capital needs will decline significantly, to nearer $20 million annually once the Parrish project is complete. This level of reduced spending will be supported by equity given Owensboro's average operating EBITDA of over $65 million over the past four fiscal years.
SUSTAINED CASH FLOW NECESSARY
Despite consistently robust operating performance, Owensboro has only limited room for operating volatility against its debt burden. Total debt equaled $505.2 million at Nov. 30, 2013, equal to 60.1% of capitalization against Fitch's 'BBB' category median of 48.9%. Further, it covered MADS of $37.9 million at a slim 1.3x by operating EBITDA through the same six month interim period, against Fitch's 'BBB' category median of 2.7x.
Leading market position within the 11-county service area coupled with the recent reopen of a key bridge should provide better clinical volume growth going forward, as a key route to the hospital from Indiana was closed for the better part of calendar year 2013. Additionally, a newly constructed highway transit routes to/from Owensboro is expected to open later in 2014, which will provide better access.
Owensboro is budgeting for steady operating cash flow for fiscal 2014 (year-end May 31), and expects incremental improvement in cash flow and balance sheet replenishment as it stabilizes in its new facility and completes the Parrish Campus project. Fitch expects stable to improved operating profitability over the next 12-24 months, which will be essential to maintaining the 'BBB+' rating.
DISCLOSURE
Owensboro covenants to provide annual audited disclosure no later than 180 days following fiscal year end and quarterly disclosure no later than 45 days after quarter end for the first three quarters, and no later than 60 days following the fourth quarter. Disclosure is provided via the Municipal Securities Rulemaking Board's EMMA System. Fitch has received timely and thorough disclosure and maintained good access to management.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria' (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=822465
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.