CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on the following Kerrville Health Facilities Development Corporation bonds, issued on behalf of Sid Peterson Memorial Hospital (dba Peterson Regional Medical Center, PRMC):
--$68.8 million series 2005
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of gross revenues, a debt service reserve, and a mortgage on hospital property.
KEY RATING DRIVERS
SIGNIFICANT IMPROVEMENT IN PROFITABILITY: The removal from Rating Watch Negative and assigned Stable Outlook reflects PRMC's successful efforts at improving operating performance in 2013 (fiscal year ended June 30). PRMC generated a healthier 2.9% operating margin in 2013 following several years of operating losses, which were prompted by the loss of its Medicare sole community hospital (SCH) status in fiscal 2012.
STEADIED DEBT SERVICE COVERAGE: Following a missed coverage covenant in fiscal 2012 which required a waiver and consultant call in, PRMC produced improved coverage of maximum annual debt service (MADS) of 4.3x by EBITDA.
MODEST DEBT AND CAPITAL NEEDS: With the completion of its medical office building in 2013 and a relatively low average age of plant, PRMC's ongoing capital demands are manageable. Further, its 100% fixed rate debt burden is moderate, as evidenced by 37.8% debt to capitalization in 2013.
STRONG BALANCE SHEET: The 'BBB-' rating continues to be supported by PRMC's solid balance sheet, with metrics which outperform Fitch's 'BBB' category medians. Solid liquidity is expected to offset its small revenue base and history of light profitability for the rating category.
STABLE MARKET POSITION: PRMC's position as the only hospital within its service area provides for a stable and leading market position. In 2013, PRMC maintained an inpatient market share of over 60% which is consistent with prior years.
RATING SENSITIVITIES
SUSTAINED OPERATING PERFORMANCE: With the loss of its Medicare SCH status in 2012 and the associated supplemental reimbursement, PRMC must continue rigorous expense management to preserve its operating margins. Fitch expects PRMC will sustain operating EBITDA at levels consistent for the rating going forward, and PRMC is budgeting for an 11.2% operating EBITDA margin in fiscal 2014.
CREDIT PROFILE
PRMC is a 124-licensed-bed community hospital located in Kerrville, TX approximately 60 miles from San Antonio. The system also includes a foundation and a physician group practice organization. PRMC had total operating revenues of $100.9 million in fiscal 2013.
IMPROVED PERFORMANCE
PRMC was successful in its efforts to recover its operating profitability in fiscal 2013, producing a very healthy 21.9% EBITDA margin which generated solid 4.3x coverage of MADS. Improved performance was the result of successful expense management (total expenses were approximately $2 million below budget) as well as approximately $9 million in investment income.
PRMC is budgeting for a return to more level operating performance for fiscal 2014, near 14% in EBITDA and 11.2% operating EBITDA. Fitch notes this level of performance is in line with historical performance, and consistent with year-to-date results. Through the 8-month interim period ended February 28, 2014 PRMC produced a 16% EBITDA and 13.4% operating EBITDA margin.
MANAGEABLE CAPITAL NEEDS
PRMC's capital needs are light, as reflected in a low 8.1 years average age of plant in fiscal 2013. PRMC anticipates spending approximately $7 million on capital, which is in line with depreciation expense and will be funded with cash flow. No additional debt is expected, and at June 30, 2013 PRMC had $69 million in long-term debt, which is all fixed rate. MADS is $5.7 million, and debt service is level through maturity in 2036.
BALANCE SHEET STRENGTH
At Feb. 28, 2014 PRMC had $97 million in unrestricted liquidity, equating to 394.5 days of cash on hand (DCOH) and 144% cash to debt, well ahead of Fitch's 'BBB' category medians of 138.9 DCOH and 82.7% cash to debt. Fitch notes that a healthy balance sheet is expected to offset the risks associated with PRMC's small revenue base including exposure to negative events such as the loss of SCH status in 2012.
Fitch notes that PRMC has appealed the decision to revoke SCH status, which was retroactive to fiscal 2008. Final resolution of this appeal is expected by June 30, 2014. Meanwhile, PRMC has thus far repaid $6.6 million (using operating cash flow) out of a total $12.8 million refund payable to the Centers for Medicare and Medicaid Services (CMS). The remaining $6.2 million will be paid out of cash flow once CMS completes its claim review.
DISCLOSURE
PRMC covenants to provide audited annual financial statements within 150 days of fiscal year end and quarterly disclosure within 45 days of quarter end to bondholders. Interim disclosure is limited to the income statement only, which Fitch views negatively. Disclosure information is disseminated through the Municipal Securities Rulemaking Board's Electronic Municipal Market Access (EMMA) system.
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:
Nonprofit Hospitals and Health Systems Rating Criteria - Effective July 23, 2012 to May 20, 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827453
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