CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on the following Tyler Health Facilities Development Corporation revenue bonds (Mother Frances Hospital Regional Health Care Project) issued on behalf of Trinity Mother Frances Health System, TX (TMFHS):
--$51.4 million revenue bonds series 2011;
--$65 million hospital revenue bonds series 2007A;
--$23 million hospital revenue bonds series 2007B.
The Rating Outlook is revised to Positive from Stable.
TMFHS has an additional $49.1 million in direct placement debt not rated by Fitch.
SECURITY
The bonds are secured by a revenue pledge, a mortgage on the main hospital campus in Tyler, and a debt service reserve fund.
KEY RATING DRIVERS
OPERATING IMPROVEMENT: The Outlook revision to Positive reflects the better than expected operating performance through fiscal 2015 (unaudited, June 30 year-end), driven by successful physician alignment and efficiency efforts, market share growth, and focused work on operating efficiency and expense controls. TMFHS's operating margin improved to 10% in fiscal 2015, from 6.7% in fiscal 2014.
STRONG LIQUIDITY GROWTH: TMFHS's liquidity has grown over 70% since fiscal 2013 from $180.9 million to $310.7 million at fiscal 2015. As a result, key liquidity metrics of 175.9 days cash on hand (DCOH), 15.7x cushion ratio and 156.4% cash-to-debt, well exceed the respective 'BBB' medians of 161.5 DCOH, 11.1x and 89.5%. Balance sheet stability is anticipated going forward.
MODERATE LEVERAGE: TMFHS's total debt burden remains manageable for the rating level. In 2015, maximum annual debt service (MADS) as a percent of revenue and debt to capitalization were 2.6% and 34.2%, respectively, both favorable to Fitch's 'A' category medians of 2.8% and 36.2% respectively. No additional debt is planned, as TMFHS's capital outlays are expected to be funded with cash flow.
GROWING MARKET FOOTPRINT: TMFHS continues to grow and align its market share via its well-aligned physician base and favorable payor relationships. For 2015, TMFHA had 65.1% share in Smith County, versus the 35.3% share held by its primary competitor. TMFHS has benefitted from strong growth in its medical staff, generating good clinical volume growth in 2015 and broader market reach in the system's secondary and tertiary markets.
RATING SENSITIVITIES
SUSTAINED PROFITABILITY: Should Trinity Mother Frances Health System maintain solid operating cash flow and coverage at 'A' category medial levels over the near to intermediate term, upward rating movement is possible. Trinity Mother Frances Health System is budgeting for steady operating results in fiscal 2016. Fitch notes that sustained profitability may be reliant in part upon extension of the state's Medicaid 1115 Waiver program beyond September 2016.
CREDIT PROFILE
TMFHS is located in Tyler, TX and operates a total 469 beds (524 licensed) at its flagship Mother Frances Hospital, the Louis & Peaches Owen Heart Hospital, and critical access hospitals in Jacksonville and Winnsboro. Additional entities include the Trinity Clinic (a multispecialty physician group), a foundation, a regional reference laboratory, and ownership interests in two specialty hospitals. Total system revenues were $750.7 million in unaudited fiscal year 2015 (June 30 year-end).
Fitch's analysis is based on the consolidated TMFHS system. The obligated group includes the Mother Frances Hospital and other related facilities in Tyler, which produced $582.4 million in total revenues in unaudited fiscal 2015 (77.6% of the system total).
OPERATING IMPROVEMENTS
Sustained efforts at building aligned medical staff and improving operating efficiencies across clinics and hospitals resulted in better than expected profitability in fiscal 2015. While revenues grew by 5%, operating expenses grew just 2%. Further, inpatient discharges were up 4% and adjusted admissions increased over 20% from fiscal 2014. While revenues remain largely split between inpatient and outpatient services, TMFHS is making concerted efforts to broaden its regional footprint and market position with targeted ambulatory expansion. Additionally, new efforts in population health as well as ongoing operating efficiency work should help sustain these stronger results over the near to intermediate term.
Upward rating movement will be contingent upon TMFHS sustaining robust operating cash flow at levels which support coverage at or above Fitch's 'A' category median, and preserve its liquidity against planned capital expenditures. For fiscal 2016, TMFHS is budgeting for a 9.5% operating margin and steady coverage near 5x, with stable performance in 2017.
Fitch notes that TMFHS receives a significant amount of supplemental funds which bolster operations, totaling nearly $48 million in 2015 (equal to 6.6% of total revenue). These funds include approximately $16 million in Medicare and Medicaid disproportionate share hospital (DSH) revenues, and nearly $32 million in Texas Medicaid 1115 Waiver funds. Currently, the five-year waiver program ends September 2016 and there is uncertainty regarding its renewal.
ROBUST LIQUIDITY GROWTH
TMFHS's liquidity improved further in 2015, in part due to strong operating cash flow as well as ongoing revenue cycle improvements. Growth in unrestricted cash and investments has been robust, up nearly 72% from 2013-2015 versus a 9% decline in total debt and 15% increase in total revenues. Days in accounts receivable declined to 39.2 at June 30, 2015 from a high above 50 days during fiscal 2013. Overall asset allocations remain moderate, and TMFHS has not had a historical reliance on investment income to generate operating cash flow and debt service coverage.
Fitch notes that TMFHS maintains a defined benefit church plan which is 65% funded, with annual contributions near $9 million expected. In addition, healthy capital plans for fiscal 2016 near $73 million in the consolidated group will likely hamper meaningful balance sheet growth in 2016. Still, Fitch expects balance sheet metrics will at least remain stable, with incremental growth in unrestricted liquidity commensurate with revenue growth.
DEBT PROFILE
As of June 30, 2015, TMFHS had a total $198.6 million in long-term debt, of which approximately $14 million (7%) was variable rate direct placement debt through maturity in 2022. TMFHS has an additional $35 million in direct placement debt fixed through maturity in 2020. TMFHS terminated its $37.5 million notional basis swap in March 2015, and has no other swaps outstanding. MADS equals $19.8 million on a consolidated basis, and is both short lived (fully amortizes in 2037) and front loaded through 2028. TMFHS's covenant tests are based on obligated group and actual annual debt service, calculated at 6.7x debt service coverage as of unaudited fiscal 2015.
DISCLOSURE
TMFHS covenants to provide quarterly and annual utilization and financial information to the Municipal Securities Rulemaking Board's EMMA system. Disclosure to Fitch has been routine and very timely, with very good access to management.
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
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