CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the approximately $85.4 million series 2015A revenue refunding bonds issued by the Hospital Authority of Richmond, Indiana on behalf of Reid Hospital & Health Care Services, Inc. (Reid). In addition, Fitch affirms the approximately $95.4 million series 2009A bonds.
The Rating Outlook is revised to Positive from Stable
Bond proceeds will be used to refund the outstanding series 2009 bonds for savings and pay for certain costs of issuance. MADS, as calculated by the underwriter is $11.01 million. The bonds are expected to price via negotiation the week of Feb. 9.
SECURITY
The bonds are secured by a security interest in the unrestricted receivables of the obligated group.
KEY RATING DRIVERS
SOLID FINANCIAL PERFORMANCE: The Positive Outlook reflects Fitch's expectation that the improved core operating performance achieved over the last few years will be sustained generating further improvement in liquidity growth and solid debt service coverage.
LEADING MARKET POSITION: Reid has a dominant market position in its primary service area (PSA) of approximately 80% and has sole community provider status. However, Fitch notes that service area characteristics are mixed with little growth, an aging population and an economy with a heavy concentration in manufacturing.
HEALTHY LIQUIDITY: Reid's liquidity position is a credit strength and helps to alleviate some of the risk related to Reid's mixed service area characteristics. At Dec. 31, 2014 (unaudited; year-end), Reid had $241.3 million in cash and unrestricted investments equaling a solid 262.7 days cash on hand and 144.2% cash to debt; both of which exceed the respective 'A' category medians of 199.2 and 131.2%.
IMPROVED FISCAL 2014 OPERATING PROFITABILITY: Reid's operating profitability has fluctuated, mostly a result of weak service area characteristics and costs associated with the replacement facility, but Reid showed solid operating profitability in fiscal 2014 (unaudited) with operating margin of 1.2% and operating EBITDA of 11.1%.
SOLID DEBT SERVICE COVERAGE: Debt metrics compare favorably against the 'A' category medians, with historical coverage of pro forma maximum annual debt service (MADS) by EBITDA of 4.6x and 4.0x in fiscal 2014 (unaudited) and 2013, respectively, which exceed the 'A' category median of 3.8x. With a replacement hospital facility completed in 2008, Reid has a low age of plant at 8.3 years in fiscal 2014, and moderate capital needs over the long term.
RATING SENSITIVITIES
SUSTAINED STRONG OPERATING PERFORMANCE: Continued operating profitability at current levels combined with further strengthening of liquidity metrics will likely lead to positive rating movement over the next 24 months.
CREDIT PROFILE
Located in Richmond, IN, Reid is a 223-licensed bed community hospital (with 153 staffed beds, including geropsychiatric and acute rehabilitation beds), which is designated as a sole community provider. Reid had total operating revenue of $368 million in fiscal 2014 (unaudited). There are 201 physicians on staff and 73 physicians are employed through Reid Physician Associates (RPA), a wholly owned subsidiary of Reid, founded in 2008 that is part of the obligated group. Fitch's analysis is based on the consolidated financial results of Reid, which may include certain non-obligated entities.
SOLID LIQUIDITY
Reid's unrestricted cash and investment position continues to be a credit strength, which provides a solid financial cushion to insulate the bondholders against historical volatility in operating performance. While the absolute level of unrestricted cash and investments is down in fiscal 2014 compared to the prior year end, the decline reflects the management's decision to end its outsourcing of revenue cycle activities. At FYE 2014, days in accounts receivable increased to 63.6, which is up from 57.5 at FYE 2013. Fitch expects Reid to improve days in accounts receivable even further in 2015. At Dec. 30, 2014 (unaudited) unrestricted cash and investments of $241.8 million equated to 262.7 days cash on hand, 21.9x cushion ratio and 144.2% cash to debt; each of which exceeded the respective 'A' category medians of 199.2 days, 17x and 131.2%.
Reid completed the construction of a new hospital facility in 2008 and has limited capital needs over the next few years. Reid had an average age of plant of 8.3 years in fiscal 2014 compared to the 'A' category median of 10.5 years and no major debt plans anticipated over the near to medium term.
IMPROVED FINANCIAL PERFORMANCE
Reid generated $4.3 million of income from operations on total revenues of $368 million (1.2% margin) in fiscal 2014 (unaudited), which is an improvement from operating losses of $6.9 million (-2.1% operating margin) in fiscal 2013. Operating EBITDA in fiscal 2014 (unaudited) was 11.1%, up from 9.6% in fiscal 2013 and favorable against the 'A' category median of 9.5%. The decline in profitability in fiscal 2013 was mostly caused by the implementation of electronic medical records and disruption of revenue cycle. Fitch views positively the recent announcement that the state is expanding Medicaid eligibility in 2015 through creation of the Healthy Indiana Plan (HIP) 2.0, which will expand Medicaid and is expected to benefit Reid by about $300,000 in fiscal 2015. Furthermore, management has implemented LEAN initiatives and achieved over $23 million in process improvement savings in fiscal 2014 and expects an additional $20 million in improvements in fiscal 2015. Reid's financial performance was also positively impacted by the approximately $5.5 million Hospital Assessment Fee (HAF) program payment and expects a similar payment in fiscal 2015. Reid has budgeted a 1% operating margin in fiscal 2015, which Fitch believes is manageable.
DOMINANT MARKET SHARE POSITION
Reid has a dominant market position of about 80% in Wayne County, its primary service area (PSA), with no other facility garnering more than a 5% share. Reid competes primarily with nearby facilities of Indiana University Health (IUH; rated 'AA-'; Outlook Stable), St. Vincent Health in Indianapolis (part of Ascension Health; rated 'AA+'; Outlook Stable), and small community based facilities. The PSA has an aging patient base with low population growth but growth is reported to be strong in Reid's secondary service area, which extends to Ohio. Reid's core strategy is to improve and increase access to Reid to maintain or replace volumes reduced by its focus on population and disease management efforts. Specifically, management is targeting outpatient expansion in its secondary service area to redirect volume to Reid that might otherwise have gone west to Indianapolis or east to Dayton. The Greenville Medical Office Building, which is part of this regional referral strategy, is on track to open in March 2015. Management is also aiming to provide care in the most efficient and effective settings to improve community health and is focusing on expanding home health, acute rehabilitation, palliative care, hospice and other services.
DEBT PROFILE
Reid has $95.4 million of traditional fixed-rate bonds outstanding (series 2009A), which will be refinanced with the series 2015A issuance. Additionally, Reid has $78.3 million of series 2012A bonds directly placed with JP Morgan Chase, which are not rated by Fitch but factored in the analysis. Reid's debt load is moderate with pro forma MADS at 3% of fiscal 2014 revenue (unaudited), favorable against the 'A' category median of 3.1%. Pro forma debt service coverage by EBITDA and operating EBITDA were solid at 4.6x and 3.7x, respectively and exceed the 'A' category medians of 3.8x and 3.1x.
Reid has two outstanding swaps with Citigroup as the counterparty. The total notional amount is $80.3 million. This is a fixed-rate payer swap that terminates in 2045. The mark-to-market valuation as of Dec. 31, 2014 was negative $20.3 million. Overall, Fitch does not view Reid's swaps as a credit concern since collateral posting requirements only occur if either entity's rating falls below 'A-'.
DISCLOSURE
Reid covenants to submit audited consolidated financial statements within 150 days after year-end, unaudited financial statements 60 days after the first three quarter-ends, and utilization statistics 60 days after each quarter-end, to the MSRB's EMMA system.
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.
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
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979044
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