NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' rating on the following Karnes County Hospital District (TX) bonds, issued on behalf of Karnes County Hospital District (KCHD, dba Otto Kaiser Memorial Hospital):
--$46 million hospital revenue bonds, series 2014.
The Rating Outlook is Stable.
SECURITY
A pledge of gross revenues (excluding ad valorem tax revenues) of the hospital district, with additional security provided by a mortgage and a debt service reserve.
KEY RATING DRIVERS
HIGH DEBT BURDEN: KCHD is highly leveraged, as a result of $46 million in project debt, which brings debt to capitalization to a high 58% in 2015 (unaudited) and maximum annual debt service (MADS) as a percent of total revenue (including property tax revenue) equal to 12%, well above the 3.6% 'BBB' category median. Robust EBITDA supported by $7.4 million in tax revenues in 2015 resulted in solid debt service coverage in line with Fitch's 'BBB' category median.
PROJECT DELAYED BUT WITHIN BUDGET: KCHD's replacement hospital is approximately two months behind schedule as a result of poor weather in 2015, but Fitch does not believe that the delay will materially affect operating cash flow or liquidity. The delay has resulted in the use of $300,000 out of $1 million contingency, but remains within budget. The replacement hospital is now projected to open in March 2016.
SIGNIFICANT PROPERTY TAX SUPPORT: The 'BBB' rating reflects the significant benefit KCHD receives from its ability to levy property taxes. KCHD received $7.4 million in tax revenue in fiscal 2015, representing 28.8% of operating revenues and helping to produce a robust 34.3% EBITDA margin and 2.8x coverage of MADS by same. Absent the benefit of tax revenue, KCHD produced weak operating EBITDA coverage of 0.5x in 2015. Fitch's expectation is that tax revenues will total at least $7 million going forward; unexpected material declines in tax support would likely negatively pressure the rating.
DECLINING ASSESSED VALUE; MARGIN REMAINS: The local economy is highly concentrated in Eagle Ford Shale mineral assets, the valuation of which drove strong taxable assessed value (TAV) growth through 2015 and a 15.9% year-on-year decline in 2016. Offsetting this precipitous contraction is KCHD's ample taxing margin, with a 7.9-cent tax, well under the 75-cent state limit. Further moderate declines in assessed valuation and further economic retrenchment can be tolerated at the current rating level.
MIXED LIQUIDITY METRICS: KCHD's liquidity metrics are mixed, with strong days cash on hand (333 days) but weak cushion (5.2x) and cash to debt ratios (36.3%) as a result of its high leverage. Steady to improving liquid cash is expected going forward.
CRITICAL ACCESS DESIGNATION: The rating also reflects KCHD's critical access hospital (CAH) designation, which provides enhanced Medicare reimbursement as a strong mitigating factor against capital and operating costs for these small, rural facilities.
RATING SENSITIVITIES
SUSTAINED TAX REVENUE: Significant volatility or erosion in the amount of tax revenue, while unexpected, would likely pressure the rating, as these funds are necessary to provide adequate debt service coverage.
PROJECT EXECUTION: The rating incorporates the risks associated with the construction, completion, and occupancy of the replacement facility in 2016. Rating pressure is possible should the replacement project exceed budget or lag further behind schedule, affecting operating cash flow or liquidity.
CREDIT PROFILE
Karnes County Hospital District (KCHD), d/b/a Otto Kaiser Memorial Hospital, currently owns and operates a licensed 25-bed, critical access hospital (CAH) located in Kenedy, Texas approximately 60 miles southeast of San Antonio. KCHD is the only hospital located in Karnes County and provides healthcare services primarily to the residents of Falls City, Karnes City, Kenedy, and Runge. In addition to revenues derived from inpatient, outpatient and emergency services, KCHD receives tax support for operations and management in the form of ad valorem property taxes. Total operating revenues (less $7.2 million in tax support) were $17.1 million in unaudited fiscal 2015 (June 30 year-end).
HIGH DEBT BURDEN
KCHD's balance sheet is strained, as demonstrated by a weak 5.2x cushion ratio and 36.3% cash-to- debt. Both are well below Fitch's 'BBB' category medians of 11.1x and 89.5%, respectively. The $46 million series 2014 bonds are fixed rate and result in MADS of $3.1 million. Debt service is level and interest is not capitalized through the project. KCHD will make its first full debt service payment in February 2016. Coverage by EBITDA was 2.8x in 2015, which includes tax revenues.
MATERIAL TAX SUPPORT
The 2014 bonds are secured by KCHD's operating revenues, excluding tax revenues. However, tax revenues provide necessary support of operating performance to generate sufficient cash flow and debt service coverage and are included in KCHD's rate covenant calculation. KCHD received $7.4 million in tax revenue in fiscal 2015, which Fitch includes in non-operating revenue. This helped produce a robust 34.3% EBITDA margin and 2.8x coverage of MADS by same. Absent the benefit of tax revenue, KCHD produced weak operating EBITDA coverage of 0.5x in 2015.
KCHD's tax rate may not exceed 75 cents per $100 of TAV according to statute, and is set by the board annually. The rate will be 7.9 cents per $100 in fiscal 2016, well below the threshold. Fitch anticipates KCHD will generate at least $7 million of tax revenue annually going forward due to its ample tax rate flexibility, despite tax base sensitivity to mineral asset valuations.
REPLACEMENT PROJECT
Total project costs are $46 million, with $42 million budgeted for a replacement hospital and $4 million for a wellness center. The facility is being built on land adjacent to the existing facility, and will bring KCHD up to contemporary clinical space standards. Fitch expects a higher expense base once the new facility opens in early 2016, which will impact operating profitability. This will be partially offset by the cost-based reimbursement KCHD receives from Medicare.
DISCLOSURE
KCHD covenants to provide annual disclosure within six months of fiscal year end to the MSRB's EMMA system, including financial and operating data. There is no provision for quarterly disclosure, which Fitch views negatively.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Not-for-Profit Hospitals and Health Systems Rating Criteria (pub. 23 Sep 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=779548
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989960
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989960
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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