CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the approximately $55.8 million Indiana Finance Authority series 2014A fixed rate revenue bonds issued on behalf of Major Hospital (Major).
Proceeds of the series 2014A fixed rate bonds will be used to fund a portion of the construction of a 280,410 square foot replacement facility and pay for certain costs of issuance. The total cost of the replacement facility is expected to be approximately $85 million and the remainder of the funding will be from equity, which is expected to occur at the end of construction. After this issuance, Major Hospital will have approximately $82.1 million in debt outstanding, including the series 2014B bonds, a direct placement, which will be completed after the series 2014A bonds close, and is included in the analysis but not rated by Fitch. The series 2014B bonds are refunding Major's existing series 2009 debt.
The series 2014A bonds are expected to price the week of September 22 via negotiation.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by pledged revenues of the obligated group and a mortgage on the replacement hospital.
KEY RATING DRIVERS
BENEFIT OF LONG-TERM CARE AFFILIATIONS: Major has significantly benefited from additional revenue through its long-term care affiliations. Major has entered into 31 lease agreements with long-term care facility providers as of June 2014, which allows the hospital to share intergovernmental transfer (IGT) payments, resulting in $8.5 million net revenue in fiscal 2013 and is expected to grow to more than $20 million in net revenue annually. Fitch includes this revenue in non-operating income and this rating incorporates the benefit of these payments. Fitch does not expect that this funding mechanism will change in the near term and either party has the ability to terminate the lease agreements without cause with 90 days written notice. Fitch expects these payments will strengthen the balance sheet over the next few years, which could continue to support the rating level even if the payments are eliminated. However, a significant change to these payments in the near term would negatively impact the rating.
HIGH PRO FORMA DEBT BURDEN: After this bond issuance, Major Hospital will have about $82.1 million in debt outstanding and pro forma maximum annual debt service (MADS) will be a high 4.8% of fiscal 2013 revenue (consolidated financials excluding long-term care revenues and expenses). Pro forma MADS coverage by EBITDA and operating EBITDA at June 30, 2014 of 5.4x and 1.7x, respectively, are in line with the 'BBB' category medians. Given its small revenue base, Fitch believes that Major's financial flexibility is limited and does not allow for significant deviation from expected cash flow to provide for continued solid debt service coverage.
LIGHT OPERATING PROFITABILITY: Operating profitability for the hospital (or 'enterprise'; consolidated excluding long-term care revenues and expenses) is light, mostly as a result of losses on the employed physicians. Operating margin and operating EBITDA margin in fiscal 2013 were 0.9% and 6.7%, respectively, compared to the 'BBB' category medians of 1.1% and 6.7%. Fitch expects operating profitability to improve as physician acquisitions and losses are stabilized.
STRONG PHYSICIAN ALIGNMENT: Major has pursued an employed physician model for more than 15 years and currently employs 59 providers. About 90% of revenues are from employed or contractual physicians. In addition, Major Medical Group has a joint venture with Franciscan Alliance (rated 'AA'; Stable Outlook by Fitch), which covers a portion of the physician group losses.
GOOD MARKET SHARE POSITION: Major Hospital maintains a strong market position in its primary service area in the city of Shelbyville and there are high barriers to entry given its employed physician model. Although the population of the service area is small, this also limits competitive threats as the characteristics of the service area are somewhat unfavorable.
RIGHT-SIZED REPLACEMENT FACILITY: The replacement facility will right-size the bed component to 46 all-private beds, down from 61 (excluding neonatal). Located off interstate 74 and Indiana State Road 9, the replacement facility will be part of Intelliplex Park, a state-certified Technology Park that currently houses several of Major's outpatient facilities including the Benesse Oncology Center, reNovo Orthopaedic Center and UnaVie Cardiology Center. Fitch views this replacement hospital project favorably as the existing facility does not meet current demands for healthcare delivery and would be costly to remodel and maintain.
RATING SENSITIVITIES
CONTINUED LONG-TERM CARE AFFILIATIONS: The rating incorporates the benefit of the IGT payments Major receives from its lease agreements with 31 long-term care providers (expected to increase to over 40 providers by year-end). If this additional revenue stream is eliminated in the near term, it could result in multi-notch negative rating pressure for the hospital.
EXECUTION OF CONSTRUCTION PROJECT: Fitch expects Major Hospital to complete and transition to its replacement facility on time and within budget. A significant deviation from plan could result in negative rating pressure.
CREDIT PROFILE
Major Hospital is a 61-bed city/county owned acute care hospital located in Shelbyville, Indiana, which is about 26 miles southeast of Indianapolis. Major Hospital is considered a component unit of the City of Shelbyville and Shelby County. Both the city and county have the ability to assess a levy on the assessed value of property in the city of Shelbyville and Shelby County on behalf of the borrower. However, the levy has not been exercised since 1993 and the borrower has no intention of requesting a levy. Fitch's analysis is based on the hospital's consolidated audits, which includes all affiliated entities and is adjusted to exclude the revenues and expenses of the long-term care facilities, but includes the net impact of IGT in non-operating revenue. Total revenue of the enterprise in fiscal 2013 (December 31 year-end) was $113.4 million.
BENEFIT OF LONG-TERM CARE AFFILIATIONS
This rating incorporates the benefit of IGT payments Major receives from its relationship with long-term care facilities. Major Hospital owns the operating license and is the party to a long term care facility's Medicaid provider agreement and splits the additional upper payment limit (UPL) funds with the long-term care facility.
Fiscal 2012 was the first year that Major entered into these relationships and the hospital realized approximately $1.1 million of IGT payments from its lease agreements with three long-term care providers. In fiscal 2013 the hospital realized about $8.5 million of IGT payments from its relationship with 21 long-term care facilities. Going forward, management has budgeted for a $20 million annual net benefit from IGT payments. The rating is based on the assumption that these payments will continue for at least the next three years. If these payments are eliminated in the near term, multi-notch negative rating pressure would likely occur.
HIGH DEBT BURDEN
One of the primary credit risks is Major Hospital's high pro forma debt burden. After the series 2014A bond issuance, Major Hospital will have about $82 million in debt outstanding, which is more than double its current debt load. Pro forma MADS of $5.4 million is a high 4.8% of fiscal 2013 revenue. In addition, Major Hospital's enterprise revenue base is small compared with others in the 'BBB' category, limiting flexibility and making the credit inherently more vulnerable to future adverse events, including changes to supplemental payments. Major does have a high percentage of revenue from outpatient service, which Fitch views positively.
LIGHT PROFITABILITY
Fitch considers Major Hospital's operating profile to be modest, with a relatively small revenue base and a history of adequate operations for the consolidated entity, mostly because of its significant employed physician model. A reliance on IGT payments is noted and the rating is based on the expectation of significant IGT payments over at least the next three years.
Operating margin for the enterprise in fiscal 2013 was 0.9% and operating EBITDA was 6.7%, compared to the 'BBB' category medians of 1.1% and 7.9%, respectively. Through the six months ending June 30, 2014, operating margin improved to 3.7% and operating EBITDA was 8.8%, reflecting Major Hospital's improved operations and joint venture with the Franciscans, which provides for shared expenses of the Medical Group.
GROWING LIQUIDITY
Major Hospital's liquidity increased in 2013 and 2014 as a result of the benefit of IGT payments from its relationships with long-term care facilities. It is expected that steady cash flow from operations and the long-term care IGT payments will serve to further bolster Major Hospital's balance sheet over the near- to medium-term.
At June 30, 2014 (six-month interim) unrestricted cash and investments for the enterprise was $97.9 million, which equals 360.5 days cash on hand, 18x pro forma cushion ratio and 119.2% cash-to-debt; all favorable to the respective 'BBB' category medians of 145 days, 10.5x and 93.6%.
GOOD MARKET SHARE POSITION
Major Hospital controls the market with 61.5% of the market share in the primary service area as of 2013, which is up from 60.1% in 2012 and 58.8% in 2011. The next closest competitor is IU Health- Methodist Hospital, located 34 miles away, with 4.7% of market share in the primary service area, followed by Community Health East with 4%. Major Hospital has been growing its presence in its secondary service area and in 2013 had 7.3% of total visits from Rush County, up from 6.9% in 2012 and 5.8% in 2011.
PHYSICIAN AND IT INVESTMENT
Major Hospital's employed physician base is one of the primary credit strengths and creates a barrier to enter the market. There are no independent physician practices nor urgent care or retail clinics in the PSA.
Major Hospital started its physician integration strategy in 1997 with certain service lines (pediatric) and continued to expand and began a relationship in 2005 with the family practice group. As of June 30, 2014 Major Hospital had 57 active members on its medical staff, 14 of which have been added since 2012. The top 10 physicians are all employed by Major Hospital and make up 73.6% of total hospital admissions and 52.14% of total revenue.
Another credit strength is Major Hospital's investment in technology. The hospital reached stage I meaningful use in 2011 and expects to meet stage II meaningful use certification for its Meditech system by Sept. 30, 2014 and for its NextGen system by Dec. 31, 2014. In addition, Major Hospital is a member of Indiana Health Information Exchange for clinical data exchange with 28 Indiana Hospitals.
RIGHT-SIZED REPLACEMENT FACILITY
The replacement facility will right-size the bed component to 56 all private beds, down from 72 (including neonatal beds). Located off interstate 74 and Indiana State Road 9, the replacement facility will be more easily accessible and will be part of Intelliplex Park, a state-certified Technology Park that currently houses several of Major's outpatient facilities including the Benesse Oncology Center, reNovo Orthopaedic Center and UnaVie Cardiology Center. Although there are execution risks associated with the construction of a replacement facility, Fitch views this replacement hospital project favorably as the existing facility does not meet current demands for healthcare delivery and would be costly to remodel and maintain.
DISCLOSURE
Major Hospital will covenant to provide annual financial information within 180 days of the close of each fiscal year-end and quarterly information within 60 days after the end of each of the first three fiscal quarters beginning with the fiscal quarter ending March 31, 2015.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014).
'Revenue-Supported Rating Criteria' (June 16, 2014).
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=746860
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=866194
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.