NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A-' rating on the $153.33 million Series 2009A bonds issued by the Lycoming County Authority on behalf of Susquehanna Health System (SHS or Susquehanna).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a gross revenues pledge of the obligated group and mortgages on Williamsport Regional Medical Center and Divine Providence Hospital.
KEY RATING DRIVERS
DOMINANT MARKET SHARE: Susquehanna Health System is the dominant provider in its market with a 73% inpatient market share in the primary service area (PSA) and a commanding 76% share of the outpatient market. Market share was further solidified with the acquisition in fiscal 2013 of Soldiers and Sailors Hospital, part of Laurel Health System, which increased SHS's share of the northcentral portion of its service area.
REBOUNDING PROFITABILITY: Operating performance, which initially suffered after the Laurel acquisition, is showing improvement starting with the current fiscal year. Operating margin, which was in the low 1% range in the last two years, is reported at 2.7% through the nine month interim period ended March 31, 2015. The goal of the margin improvement initiative starting in fiscal year 2016 is to reach a 3% operating margin. However, operating EBITDA margins have remained solid and were 9.1% in fiscal 2014 and 10.4% through the 2015 interim period.
MIXED LIQUIDITY AND MANAGEABLE DEBT LOAD: SHS's cash and unrestricted investment of $266.2 translate into solid 194.4 DCOH and 15.9x cushion ratio, but the recent execution of a $40 million private placement bank loan, which Fitch did not rate, reduced cash to debt ratio to 105.8%, below the 131% 'A' category median. Coverage of maximum annual debt service (MADS), however, is consistent with Fitch 'A'a category median at 4x through the third quarter of fiscal 2015 ended March 31 and MADS represents a manageable 3.1% of revenues.
MAJOR CONSTRUCTION PROJECT COMPLETE: Susquehanna has completed its extensive, multi-phase $263 million project including a new patient tower in Williamsport. The issuance of the $40 million loan will fund several remaining projects of the Master Facility Plan without negatively impacting liquidity.
RATING SENSITIVITIES
MAINTAINING IMPROVED OPERATING RESULTS: With its major capital project complete, Fitch expects Susquehanna Health System to continue to implement margin improvement initiatives. A sustained stronger operating performance and an improvement in the cash to debt ratio could lead to positive rating pressure over the next two years.
CREDIT PROFILE
Susquehanna Health System (SHS) is located in Lycoming County in north central Pennsylvania, anchored by its 222 licensed bed regional referral center and teaching hospital, Williamsport Regional Medical Center (WRMC). Effective Sept. 1, 2012, SHS acquired Laurel Health System in neighboring Tioga County. The system now includes four hospitals, two physician groups, a 120 bed SNF and various other healthcare entities. Laurel remains separately obligated on its respective debt. Fitch analysis is based on the consolidated system. The obligated group represents 84% of system revenues and 87% of system assets.
Several management changes were implemented recently as part of a five year management succession plan, including the March 31, 2015 appointment of Eric Pohjala to replace a retiring former CFO. The new CFO has experience both in hospital and ambulatory management.
DOMINANT MARKET SHARE
SHS is the dominant provider in its market with a 73% market share in its PSA. The next largest share is approximately 12%, belonging to Geisinger Health System, headquartered in Danville, approximately 35 miles southeast of Williamsport. SHS has entered into several affiliations in order to bolster its market presence, including a 10-year management agreement with the Cleveland Clinic (Clinic) for cardiology. The relationship makes SHS the Clinic's exclusive partner in a large 27 county area in Northeast Pennsylvania and SHS expects its cardiac surgery cases to double as a result.
SHS is also actively working to identify potential partners in order to gain advantages of larger scale and to better position the organization vis--vis population health management initiatives. SHS is already a part owner with Pinnacle Health in the River Health ACO, which has 31,000 enrollees.
REBOUNDING PROFITABILITY
SHS is in the process of implementing a margin improvement initiative focused both on revenue enhancement and expenses reduction. Following a completed system-wide operational assessment the system sold its Meadows assisted living facility. Similarly, as part of the rationalization of services, given the proximity of the Divine Providence Hospital (Divine Providence) and WRMC campuses, acute care beds were transferred from Divine Providence to WRMC, focusing the Divine Providence location on psych, hospice and outpatient cancer services; psych services were also terminated at the Laurel campus.
After two years of slim operating margins, 1.3% in fiscal 2013 and 1% in 2014, the operational improvement is taking hold. The system operating income through the third quarter of 2015 was reported at $11.2 million, compared to a breakeven performance for the same period last year, equal to operating margin of 2.7% and operating EBITDA margin of 10.4%. Management expects to end the 2015 fiscal year with operating income of $12.7 million (2.3% operating margin), slightly short of the projected $14 million due to somewhat softer than anticipated volumes, but is committed to reaching operating margin of 3% by next year.
MANAGEABLE DEBT LOAD
System coverage of MADS at 4x is consistent with Fitch's 'A' category median of 3.8x, as is MADS as percent of revenues at 3.1%. The system has the majority of its Master Facility Plan executed and the $40 million private placement will fund the remaining several projects, which include a Vascular and Heart Institute at the main WRMC campus, as well as a new ED at Muncy Valley Hospital and expansion of the Cancer Center at Divine Providence. The funds will be drawn over the next 24 months and will enable SHS to preserve its liquidity, rather than use internal cash-flow as had been initially planned. Routine capital spending is projected at $30 million annually over the next five years, roughly equal to system depreciation expense.
Debt Profile
Total outstanding debt, including the recently issued $40 million Barclays Bank private placement loan (not rated by Fitch) is approximately $251 million and SHS has approximately 66% underlying fixed rate and 34% variable rate debt structure. The Barclays loan has a tax-exempt floating rate loan based on monthly LIBOR with a 2020 balloon payment. MADS used to calculate coverage in Fitch's report allows for smoothing of balloon payments as per master trust indenture provisions. In addition to the Barclays loan, SHS has an indexed floating rate direct bank loan privately placed with M&T Bank (series 2011), outstanding in the amount of $21 million, which is swapped to fixed rate. The mark-to market at March 31, 2015 was negative $363,000 and there is no collateral being posted ($10 million threshold). In May 2015 SHS terminated a basis swap, which resulted in a $795,000 payment to SHS.
Disclosure
Susquehanna covenants to file financial and operating information, and material events, with EMMA: audited consolidated financial statements, by not later than 180 days following the end of the fiscal year (June 30) and quarterly unaudited consolidated financial statements by no later than 45 days following the end of each of fiscal quarter.
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. 09 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989211
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