NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating on the following revenue bonds issued by the County of Montgomery, OH on behalf of Miami Valley Hospital (MVH), a part of MedAmerica Health System (MedAmerica):
--$35,075,000 fixed rate bonds, series 2008A;
--$28,830,000 variable rate demand bonds (VRDBs), series 2008B (Standby Bond Purchase Agreement [SBPA]: Barclays Bank);
--$27,000,000 VRDBs, series 2008C (SBPA: Wells Fargo);
--$15,000,000 private placement, series 2009B;
--$97,965,000 fixed rate bonds, series 2011A;
--$42,500,000 VRDBs, series 2011B (SBPA: Barclays Bank);
--$42,500,000 VRDBs, series 2011C (SBPA: Barclays Bank).
Additionally, Fitch affirms the 'AA-' bank bond ratings for series 2008B, 2008C, 2011B, and 2011C bonds.
The Rating Outlook is Stable.
MedAmerica also has $125.6 million in series 2012A and 2012B private placements outstanding, which is not rated by Fitch but incorporated in this review.
SECURITY
Security for all parity debt is the grant of a security interest in the unrestricted receivables of the obligated group, which comprises Miami Valley Hospital and its parent, MedAmerica Health Systems Corporation.
KEY RATING DRIVERS
SOLID OPERATING CASH FLOW: MedAmerica's operating cash flow has been strong and stable, with operating EBITDA margin averaging 13.3% since fiscal 2010 and increasing to 14% in fiscal 2014 from 11.3% in fiscal 2013. The improvement reflects the benefits of Medicaid expansion in Ohio and continued cost management initiatives. While continued pressure on reimbursement levels and static volumes are anticipated, profitability is expected to remain consistent with the rating.
SYSTEM BENEFITS: MedAmerica is managed by Premier Health Partners (PHP), formed under a joint operating agreement (JOA) with three other acute care providers in the region. While each member of the JOA is separately incorporated and is responsible for debt payments, strategic and capital decisions made on a system-wide basis and net income or loss are apportioned based on a predetermined formula. Fitch believes this JOA provides MedAmerica with a beneficial platform to navigate healthcare reform, particularly in value based models and population health management.
DEBT BURDEN TO MODERATE: Debt burden is currently somewhat elevated, with maximum annual debt service (MADS) equal to 3.4% of total revenues compared to the median of 2.6%. However, MADS decreases to $27 million after 2016 from $33 million. Due to the elevated debt burden, MADS coverage was 3.9x in 2014 and 3.4x in 2013, which compares unfavorably against the median of 5.4x.
IMPROVING LIQUIDITY: Unrestricted cash and investments grew significantly over the last two years, due to sound cash flow generation and limited capital spending. Days cash on hand (DCOH) was a strong 293 days at fiscal year end (FYE) 2014, stronger than the median of 277 days. However, cushion ratio and cash to debt of 20.5x and 152% lagged the respective medians of 26.5x and 179% reflecting a moderately high debt burden. With no major capital projects anticipated, Fitch expects liquidity metrics to continue to improve.
RATING SENSITIVITIES
STABILITY EXPECTED: Fitch expects MedAmerica to maintain its financial strength as it continues effective cost management practices and leverages PHP's overall operating platform to drive further efficiencies. With limited capital needs, Fitch believes there is some room for negative variability at the current rating level.
CREDIT PROFILE
Located in Dayton, Ohio, MedAmerica operates Miami Valley Hospital, a 970 licensed (804 staffed) general acute care hospital. MedAmerica generated $973.7 million in total operating revenues in the fiscal 2014.
Substantially all of the operations of MedAmerica are managed under a JOA with PHP, which also covers three other hospitals in the region (Good Samaritan Hospital, Atrium Medical Center, and Upper Valley Medical Center). MedAmerica is the largest JOA member and generated 54.8% of PHP's total revenues in fiscal 2014.
Under the JOA, PHP essentially manages the system of four hospitals (and other affiliated clinical sites) including approval of annual budgets, strategic plans, and transfers of assets. While PHP operates the various facilities, each of the entities are separately incorporated and solely responsible for debt service and repayment on outstanding indebtedness. Fitch's analysis is based on the operating and financial strength of MedAmerica (taking into account annual JOA transfers, if any) as well as the overall management and strategic plans of PHP.
Solid Operating Cash Flow
Operating cash flow has been strong and relatively stable. Operating EBITDA margin has averaged 13.3% since fiscal 2010 and increased to 14% in fiscal 2014 from 11.3% in fiscal 2013. The lower profitability in fiscal 2013 due to weaker revenues were improved in 2014 by continued cost management and revenue enhancement activities, including supply chain, process improvement and revenue cycle initiatives in addition to the benefits of Medicaid expansion. Revenue growth was about 3.9% in fiscal 2014 due to higher revenues per case and growth in hospital stays (admissions plus observation cases). Medicaid expansion also resulted in a decline in self-pay to 2.7% of gross revenues from 6.7% in 2013. Over the same period, expense growth was limited to a low 0.3%, attributable to a managed labor costs as well as a decline in depreciation expense. Overall, MedAmerica generated 5% operating margin in fiscal 2014 compared to 1.6% in 2013 and Fitch's median of 3.9%.
Management expects top line revenue growth in fiscal 2015 to be relatively flat and is emphasizing continued cost management initiatives. MedAmerica is budgeting $38 million in operating income compared to $48.6 million in 2014. Given expense management initiatives in place and historical operating and profitability trends, Fitch believes the budget is reasonable.
Improving Liquidity
Unrestricted cash and investments totaled $679.4 million at FYE 2014, up considerably from $486.1 million two years prior. DCOH of 293 compared favorably against the 'AA' median of 277 days. However, cushion ratio of 20.5x and cash to debt of 152% lagged the respective medians of 26.5x and 178.5%, reflecting a moderately high debt burden.
Significant liquidity growth over the last two years represents decreased capital spending, which declined to about $50 million in 2013-2014 compared to over $115 million in the prior three years. Management expects capital spending to remain muted in 2015 and 2016, which should continue to support liquidity growth.
Debt Burden to Moderate
While debt metrics are currently somewhat elevated for the rating category, Fitch expects MedAmerica's debt burden to moderate based upon the current debt amortization schedule. MADS currently equates to 3.4% of fiscal 2014 operating revenues and debt to capitalization of 37.1%, both higher than the respective medians of 2.6% and 31.1%, respectively. As a result, MADS coverage was 3.9x in 2014 and 3.4x in 2013 despite strong cash flows, comparing unfavorable against Fitch's 'AA' median of 5.4x. However, coverage metrics are expected to improve as MADS occurs in 2016 and decreases approximately 18% thereafter to $27 million. Additionally, future capital needs are modest and no new debt is anticipated.
Fitch's notes that for calculation of income available for debt service, the MTI allows for inclusion of JOA income allocation (which MedAmerica is typically a net payor). This amount totaled $24.5 million in fiscal 2014. Combined with other adjustments, MTI MADS coverage was 5x in 2014.
DEBT PROFILE
At FYE 2014, MedAmerica had outstanding $446.7 million in long-term debt, of which 32% are fixed and 68% are floating. Approximately $140.8 million are VRDBs with SBPAs expirations dates in 2016 and 2017, and $140.6 million are privately placed with indexed rates with initial put dates in 2017-2022.
Additionally, MedAmerica guarantees two series of bonds issued for Atrium Health System (AHS; a member of PHP) totaling approximately $182 million with annual debt service requirements ranging $9 million-$12 million. AHS's leverage is high, but the organization has historically generated sufficient cash flow to meet debt service requirements and maintains satisfactory liquidity. As such, while MedAmerica guarantees the principal and interest payment on both series, Fitch believes the likelihood of MedAmerica having to support debt service is remote. Accordingly, Fitch's current analysis does not incorporate AHS's debt or cash flows. Fitch notes that MedAmerica's quarterly disclosure includes calculation of MADS coverage including guaranteed debt, which has consistently exhibited sufficient coverage levels.
MedAmerica is party to four fixed rate payor swap and two basis swaps. At FYE 2014, the total notional outstanding of the fixed payor swaps equaled $210.6 million with a mark to market of negative $27.8 million. Additionally, a total of $100 million in basis swaps were outstanding, with a mark to market of positive $475,000. No collateral is currently posted.
DISCLOSURE
MedAmerica covenants to disclose annual financial statements within 150 days and quarterly unaudited financial statements within 60 days. Disclosure to date has been good and includes an income statement, balance sheet, cash flow statement, and utilization statistics. Furthermore, a consolidated PHP audit provides an in-depth summary of PHP's operations and related entities.
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 Rating 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=981113
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