NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' rating on the following Iowa Finance Authority bonds issued on behalf of Pella Regional Health Center (PRHC):
--$46.7 million health facilities revenue bonds, series 2006.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of gross revenues of the obligated group, and a first-priority mortgage on certain property.
KEY RATING DRIVERS
BALANCE SHEET GROWTH: At March 31, 2015, PRHC's unrestricted cash and investments have increased 22% to $65.8 million, from $53.7 million at year-end 2013 (Dec. 31) equating to 332.2 days cash on hand, cushion ratio of 10.5x, and cash to debt of 131.2%, all well in excess of 'BBB' category medians. Fitch views PRHC's levels of unrestricted balance sheet reserves as a primary credit strength.
CONSISTENT HEALTHY CASH FLOW: PRHC's critical access hospital (CAH) designation provides enhanced Medicare and Medicaid reimbursement, which has helped support robust operating profitability and consistent revenue growth. For fiscal 2014, PRHC produced operating and net EBITDA margins of 13.5% and 16.9%, respectively, which is mostly unchanged from prior year performance.
LEADING MARKET POSITION: PRHC remains the market leader in Marion County reflecting its CAH designation and is supported by successful recruitment and close attention to service needs in the market. Positive service area economic indicators result in lower levels of bad debt, self-pay, and Medicaid relative to its peer group.
MODERATING DEBT BURDEN: Fitch expects that PRHC's debt burden will continue to moderate as capital needs are modest and further debt is not anticipated. Debt to EBITDA of 3.5x is below the 'BBB' category median of 3.9x and significantly improved from 6.4x in 2010.
ELEVATED REVENUE SENSITIVITY: PRHC's revenue base of $77.8 million in 2014 remains a primary credit risk as it provides only limited ability to absorb adverse events, making it inherently sensitive in its medical staff, utilization trends, and changes in reimbursement methodology. However, Fitch notes that PRHC's total revenue has shown a compound annual growth rate of 4.3% year-over-year since 2011, and is currently the largest in Fitch's CAH rated portfolio.
RATING SENSITIVITIES
CONTINUED LIQUIDITY GROWTH: Fitch believes that further liquidity growth combined with sustained operating profitability at Pella Regional Health Center could result in positive rating momentum.
CRITICAL ACCESS PROGRAM: While the supplemental revenue provided to Pella Regional Health Center helps to mitigate the risks inherent to small, rural facilities, Fitch notes that the CAH program has been a target for reductions at the federal level and reductions to this program would likely have a negative impact on PRHC'S credit profile.
CREDIT PROFILE
Located in Pella, IA, in Marion County, approximately 50 miles southeast of Des Moines, PRHC is a critical access hospital with 25 acute care beds, seven medical clinics, and the Pella Hospital Foundation. Total revenues were $77.8 million in fiscal 2014.
SOLID LIQUIDITY OFFSETS SIZE & REIMBURSEMENT RISKS
Unrestricted liquidity has more than doubled since 2008, to $65.8 million as of March 31, 2015, up from $20.7 million in 2008. Liquidity metrics compare favorably with all 'BBB' medians. Growth has been driven by robust cash flow and limited capital expenditures. PRHC's capital needs are modest at present, with routine capital investment of $2.8 million budgeted in 2015 compared to $9.6 million budgeted operating EBITDA.
Fitch believes PRHC's balance sheet strength serves to mitigate the risk associated with PRHC's relatively small revenue base and exposure to potential Medicare reimbursement changes.
HEALTHY OPERATIONS; SOLID CASH FLOW
PRHC produced a 4.9% operating and 13.5% operating EBITDA margin in 2014, beating budget and continuing a trend of solid operating performance. Since 2011, PRHC has generated annual operating EBITDA margins above 13.0%, which well exceeds the 2014 'BBB' category of 7.9%. Management continues to broaden its geographic footprint through primary care clinical access, with a recent expansion into Wapello County showing some additional surgical and obstetric volume. Surgical volumes were up 12% in 2014 from 2013 and outpatient volumes were up 10%; management reports continued volume strength in 2015. Through the three-month interim period ended March 31, PRHC generated a 12.9% operating EBITDA margin.
MODERATING DEBT BURDEN
All debt is fixed-rate, and PRHC has no additional debt planned. Maximum annual debt service (MADS) is approximately $3.6 million which equates to a somewhat elevated 4.6% of 2014 revenues as compared to the 'BBB' median of 3.6%. However, PRHC's strong profitability results in solid coverage by EBITDA of 3.8x and 3.5x in 2014 and 2013, respectively.
LEADING MARKET POSITION & FAVORABLE PAYOR MIX
The 'BBB' rating reflects PRHC's leading market position. Outpatient market share was 21.3% in 2014; outpatient volumes constituted 82% of revenues in 2014.
Further augmenting the market position are favorable service area economic indicators: median income, poverty rate, and unemployment rate compare favorably against the state and U.S. averages. In addition, the local economy benefits from stable employers including Pella Corp and Vermeer Corp. Reflecting the service area's positive economic profile, PRHC's payor mix is favorable with relatively small exposure to Medicaid (10% of gross revenues) and self-pay (3% of gross revenues) through March 2014. Medicare is in line with other CAH peers at 39%.
DISCLOSURE
PRHC covenants to provide annual and quarterly disclosure to the Municipal Securities Rulemaking Boards EMMA system, consisting of a management discussion and analysis, balance sheet, income statement, statement of cash flows, and utilization statistics.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 30 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985734
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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