CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB' rating to the following revenue bonds issued on behalf of Marietta Area Health Care d/b/a Memorial Health System, Ohio (the system) bonds:
--$60,000,000 Southeastern Ohio Port Authority Hospital facilities improvement revenue bonds, (Memorial Health System Obligated Group Project) series 2015.
In addition, Fitch has assigned a 'BB' rating to the following outstanding bonds:
--$138,935,000 Southeastern Ohio Port Authority Hospital facilities revenue refunding and improvement bonds, (Memorial Health System Obligated Group Project) series 2012.
The series 2015 bonds are expected to be issued as fixed rate debt. Bond proceeds will be used for various capital projects at Selby General Hospital (SGH) and Marietta Memorial Hospital's (MMH) Belpre and Wayne Street locations; reimbursement of approximately $11 million in prior capital expenditures; refinance a $4 million note payable; fund a debt service reserve fund, and pay for certain costs of issuance. The series 2015 bonds are expected to price the week of March 9.
The Rating Outlook is Stable.
SECURITY
The series 2012 and series 2015 bonds are secured by general revenues of the obligated group, a mortgage on certain system facilities and debt service reserve funds.
KEY RATING DRIVERS
STABLE, ADEQUATE OPERATING PROFITABILITY: Memorial Health System's (MHS) operating performance has been stable and relatively consistent over the last four years. In fiscal 2014, operating and operating EBITDA margins were adequate for the rating at 0.5% and 8%, respectively. Operating performance is projected to improve over the near term as a result of strategic investment in the West Virginia service area, which Fitch thinks is reasonable. The benefit of the system's expansion of services in Belpre has been realized through the first quarter 2015 (quarter ended Dec. 31, 2014) with a 3.2% operating margin compared to the prior year period's negative 4.7% operating margin.
WEAK AND VOLATILE LIQUIDITY: MHS's light liquidity is a primary credit concern. At fiscal year-end 2014, MHS had $69.1 million in unrestricted cash and investments, equaling 80 days cash on hand (DCOH) and 45.5% cash to debt as compared to Fitch's non-investment grade (non-IG) medians of 74.8 days and 55.7%. However, MHS's liquidity position fluctuates significantly throughout the year and at Dec. 31, 2014 (three-month interim), unrestricted cash and investments had dropped to $36.8 million, equating to a very light 43.5 days cash on hand, reflecting MHS's unconventional cash management practices.
DOMINANT MARKET SHARE: The system has strong market share in its primary service area (PSA), with 65.5% of patient discharges in the PSA in 2013 compared to the nearest competitor at 12.7%.
SIGNIFICANT DEBT BURDEN: Pro forma debt to capitalization and pro forma maximum annual debt service (MADS) as a percent of total revenues at fiscal year end (FYE) 2014 are both above the non-IG medians at 65% and 4.5%, respectively. However, historical coverage of pro forma MADS by EBITDA of 2.0x and 1.9x in fiscal 2014 and 2013, respectively, compares favorably to the non-IG median of 1.8x.
STRATEGIC INITIATIVES UNDERWAY: Fitch views the system's physician alignment efforts and the expansion into the West Virginia market towards Parkersburg favorably.
RATING SENSITIVITIES
LIQUIDITY POSITION: As part of the series 2015 financing, MHS will put $11 million back on the balance sheet for prior capital expenditures, which should help stabilize the cash position. Further growth in liquidity combined with greater quarter-over-quarter stability in its liquidity position could move the rating higher.
CREDIT PROFILE
Marietta Area Health Care, Inc. (d/b/a Memorial Health System) operates the 199-bed Marietta Memorial Hospital (MMH) and a 25-bed critical access hospital, Selby General Hospital (SGH), as well as a continuing care retirement community and nursing home, which will be divested in fiscal 2015, nine outpatient care centers and 26 medical staff offices and clinical care delivery locations. MHS reported $335.2 million in total revenues in fiscal 2014 (Sept. 30 year-end).
Located in Marietta, OH, the system delivers services primarily in Washington County (OH) and Wood County (WV). The obligated group includes employed physicians and the foundation and accounted for 99% of the total net revenues of the system and 99.8% of the total assets of the system.
STABLE, ADEQUATE OPERATING PROFITABILITY
MHS's operating performance has been stable and relatively consistent over the last four years. In fiscal 2014, operating EBITDA margin of 8% compares favorably to 7.3% for non-IG medians and operating margin was adequate for the rating at 0.5%, comparing favorably to Fitch's non-IG median of negative 1.4%. Management has been able to maintain at least break-even results since 2011 despite flat inpatient volumes and observation case growth.
Performance in the first quarter of fiscal 2015 has been significantly stronger, with a 3.2% operating margin through Dec. 31, 2014. Quarterly results are favorable to prior year's negative 4.7% operating margin for the same period. Improvement was driven by the system's free-standing emergency department on its Belpre campus, which opened in August 2014 across Ohio River from Parkersburg, West Virginia's third most populous city. Net patient revenue was up 24.7% for the interim period. Fitch believes that additional efficiency efforts in the system, including more flexible staffing levels to meet daily patient volume, have augmented year-over-year performance.
WEAK AND FLUCTUATING LIQUIDITY
MHS's liquidity position is light with considerable fluctuation in the level of cash and investment throughout the year, which is a primary credit concern. At year-end 2014, MHS had $69.1 million in unrestricted cash and investments, equaling 80 DCOH, 45.5% cash to debt and 4.6x cushion ratio, against Fitch's non-IG medians of 74.8 days, 55.7% and 5.3x, respectively. Fitch notes that under current vendors terms accounts payable (AP) is extendable up to 90 days at Sept. 30 and March 31, which bolsters liquidity at year end. Liquidity was weaker at Dec. 31 (three-month interim) at 43.5 days, when AP terms are 30 days and management often pays within 15 days.
As part of the series 2015 financing, MHS will reimburse itself $11 million for prior capital expenditures. The system is budgeting to finish fiscal 2015 with approximately $103 million of unrestricted cash and investments, equating to 113 DCOH. This liquidity growth is expected to be achieved through improved revenue cycle, participation in the 340B program, (effective Jan. 1, 2015), the sale of the two senior living facilities and positive 2015 performance. While Fitch believes the growth in liquidity is possible, it seems somewhat aggressive in light of historical results.
ACCRETIVE STRATEGIC GROWTH INITIATIVES
Fitch believes that the system's recent and forward strategic initiatives are accretive and support the 'BB' rating. Strategic initiatives include ongoing physician recruitment, the addition of two operating rooms at SGH, and the Belpre campus and free-standing emergency department, which has boosted revenue to-date and is capturing some of the West Virginia market. The system has projected 9% net patient revenue growth in 2015 and 3.5% operating margin for 2015, which Fitch believes is realizable given strong first quarter performance.
DOMINANT MARKET POSITION
The system had a dominant inpatient market share of 65.5% in its PSA in 2013 with its nearest competitor at 12.7%. The system's service area is concentrated in four counties in southeast Ohio and Wood County, West Virginia. The system is expanding into Wood County, West Virginia, where it reported a 10.4% market share in 2012 (the most recent information available), and increase from 7% in 2010.
The system has an unfavorable payor mix with 65.3% of gross revenues attributable to governmental payors. However, the expansion of Medicaid eligibility in both Ohio and West Virginia is a positive credit development. Further, Selby's cost-plus reimbursement as a CAH helps mitigate concerns about the system's payor mix.
SIGNIFICANT DEBT BURDEN
The system is highly leveraged, with a 65% pro forma debt-to-capitalization ratio at FYE 2014, comparing unfavorably with Fitch's 52.7% non-IG median. Pro forma MADS of $15.2 million is a high 4.5% of fiscal 2014 revenue and includes approximately $1.8 million in capital lease payments. Pro forma MADS occurs in 2017. Assuming no significant additional capital leases in the near term, MADS will decline to $13.8 million in 2019 and $13.4 million in 2020. Operating profitability is solid and coverage of pro forma MADS by operating EBITDA was consistent at 1.8x and 1.7x in fiscal 2014 and 2013, respectively. Through the first quarter interim period coverage by operating EBITDA improved to 2.5x. Fitch believes that MHS has no room for additional debt after this issuance at the current rating level.
DEBT PROFILE
Subsequent to the series 2015 bond issuance, the system will have approximately $198.9 million of total debt outstanding. Total debt includes approximately $138.9 million fixed rate series 2012 bonds and the $60 million fixed rate series 2015 bonds. Fitch views the debt profile as conservative, with all fixed rate debt and no derivatives.
STRATEGIC DIVESTMENTS
The system is in the process of divesting its continuing care retirement community and nursing home to focus on its long term strategy, which Fitch views favorably. $14 million of proceeds from the sale has been built into management's 2015 budget and forecast. The two entities have recently been removed from the obligated group. The buyer is in the due diligence phase and the system expects closing by the end of May 2015, which will have minimal impact on overall financial profile of the system.
DISCLOSURE
The system covenants to report on its quarterly results within 60 days and year end results, capital ratios, and coverage calculations within 150 days. Further, the system covenants to report in its DCOH covenant calculation within 30 days of each semiannual calculation date.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 16, 2014);.
--'U.S. Nonprofit Hospitals and Health Systems Ratings Criteria' (May 30, 2014).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
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=980213
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