NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating on $130,480,000 of series 2009A revenue bonds issued by the Delaware Health Facilities Authority on behalf of Bayhealth Medical Center (Bayhealth).
The Rating Outlook is Stable.
Bayhealth also has $65,910,000 outstanding in series 2012 direct purchase bonds with PNC Bank, which Fitch does not rate but has incorporated into the analysis.
SECURITY
The bonds are secured by a pledge of gross revenues and a mortgage on the hospital facilities.
KEY RATING DRIVERS
EXCELLENT FINANCIAL PROFILE: Bayhealth's overall financial profile is characterized by strong liquidity, profitability, and debt metrics, with most key ratios exceeding the 'AA' medians. Robust profitability producing solid cash flow has led to balance sheet strengthening over the last several fiscal years.
STRONG MARKET LEADERSHIP: As a sole acute care hospital in its county, Bayhealth maintains a dominant position in its primary service area (PSA), with stable market share around 80%. Bayhealth also works closely with a number of healthcare providers in the region, further limiting competitive pressures.
MAJOR CONSTRUCTION PROJECTS: A multi-year, phased facilities expansion project continues, now in the third phase. Construction of a replacement facility for Milford Memorial Hospital and an ambulatory care center will begin in 2016 with target completion in 2019. The total cost is estimated to at $300 million, which will likely be funded by a combination of internal equity, contributions, and possibly debt.
RATING SENSITIVITIES
STABILITY EXPECTED: Overall operating and financial stability is expected to be maintained in the foreseeable future, supported by Bayhealth Medical Center strong operating platform and market position
ONGOING CONSTRUCTION PROJECT: Fitch believes Bayhealth Medical Center has room to absorb significant cash demands and potential new debt at the 'AA-' rating. However, material deviations from the budget may lead to negative rating pressure.
CREDIT PROFILE
Headquartered in Dover, Delaware's state capital, Bayhealth is a two-hospital system that consists of Kent General Hospital (262-staffed beds) and Milford Memorial Hospital (113-staffed beds). Total revenue in the fiscal year ended (FYE) June 30, 2015 was $553.3 million (unaudited interim financials). Fitch's analysis reflects the performance of Bayhealth Medical Group, Inc. (BMC), which is the obligated group. BMC includes the medical group, but excludes the foundation and development corporation.
Dominant and Stable Market Position
Bayhealth's inpatient market share has been maintained at around 80% and is supported by continued growth of clinical services lines, which include cardiac surgery through an affiliation agreement with University of Pennsylvania's Penn Cardiac Care and enhanced orthopaedic and oncology services through an affiliation agreement with the Penn Orthopaedic and Cancer Network.
Bayhealth's market leadership is further bolstered by its close relationships with other local hospitals. Bayhealth recently filed an application to form an Accountable Care Organization (ACO) to participate in a statewide Medicare shared savings program with Christiana Care Health System and Nanticoke Health Services (revenue bonds rated 'BBB-'; Stable). Together, the three systems control over 75% of inpatient admissions in Delaware. Fitch believes this collaborative relationship and network development will provide Bayhealth with further operating stability and increase its capacity to effectively pursue population health management.
Major Construction Plans
A multi-year, phased hospital facilities expansion project continues. Phase I was completed in 2005 and added four floors to Kent General Hospital. Phase II, also at Kent General Hospital, added three floors to the existing patient tower, doubled the capacity of the emergency department to 39 bays, and expanded parking space. Major construction projects at Kent General Hospital are now complete, with the facilities fully opened in January 2012. Strong demand at the new facility has led to the filling of shelled space (32 beds), and good volume growth has been evidenced as a result.
Planning for Phase III is well underway to build a 150-bed replacement facility for Milford Memorial Hospital and a 81,000 square foot ambulatory care center. The project is estimated to cost approximately $300 million, with construction taking place over three years beginning in 2016. The majority of spending will occur in fiscal years 2017 and 2018. Bayhealth plans to use a combination of equity, fundraising, and possibly debt to finance the project. Impact on liquidity is expected to be significant as planned capital spend is $81 million in 2016, $138 million in 2017, and $165 million in 2018 against EBITDA that has averaged $95 million over the last four years. However, Fitch believes there is sufficient room at the 'AA-' rating to absorb the impact, particularly given the current balance sheet strength and the phased approach. Significant deviations from the construction budget may pressure the rating.
Robust Profitability
Profitability ratios have weakened over the last several years despite good revenue growth as Bayhealth manages rising expenditures. Operating margin declined to 6% in 2015 from 7% in 2014 and 8.2% in 2013, and operating EBITDA exhibited a similar trend. However, weaker results are still robust for the rating level and much stronger than the operating margin budget that typically ranges from 3% to 3.5%. Further, Fitch believes the core operations remain solid, given the strong market position, new Kent General Hospital facility, and service line growth. Fitch expects Bayhealth to manage rising expenses driven by increasing employed physician base and IT and capital expenditures, and continue generating profitability metrics well in excess of the medians.
Solid Liquidity Supports Heavy Capital Spending Plans
Unrestricted cash and investments increased to $588.6 million at FYE 2015 from $446.2 million at FYE 2013 and $373.2 million at FYE 2011. Days cash on hand of 438.7, cushion ratio of 45.6x and 294.9% cash to debt are very good against the respective 'AA' medians of 289.4 days, 27x, and 201.7%. Management projects liquidity to decline to approximately $419 million at FYE 2018, and recover thereafter. Given current liquidity strength and low debt burden, Fitch expects overall balance sheet metrics to remain in line with the 'AA' medians.
DEBT PROFILE
At June 30, 2015, Bayhealth had $199.6 million in long-term debt outstanding, consisting of the series 2009A fixed rate bonds and series 2012 direct purchase bonds with PNC Bank. The series 2012 bonds were issued in June 2012 and bears interest at a variable rate, with an initial term extending to July 1, 2019. Proceeds were used to refund the series 2009B and 2009C variable rate demand bonds supported by letters of credit. Overall debt structure is relatively conservative with 66% fixed rate bonds and 34% variable rate bonds. Bayhealth has one swap outstanding with a mark to market of negative $2 million at FYE 2015.
Debt metrics are consistently strong, with MADS coverage by EBITDA averaging 7.5x for the last four years, and most recently reported at 7.2x compared to the 'AA' median of 5.7x. MADS as a percentage of revenue of 2.3% and debt to capitalization of 23.4% in 2015 also compared favorably against the respective medians of 2.4% and 28.1%.
DISCLOSURE
Bayhealth has covenanted to provide bondholders with audited financial statements within 150 days of year-end and quarterly disclosure within 60 days of quarter-end. Disclosure includes a management discussion and analysis, balance sheet, income and cash flow statements, 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. 09 Jun
2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990646
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990646
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