NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the rating to 'BBB-' from 'BB+' on the following bonds issued by the Flint Hospital Building Authority on behalf of Hurley Medical Center (Hurley):
--$2.65 million revenue and refunding bonds series 2003;
--$33.22 million revenue rental bonds series 2010;
--$21.94 million revenue rental bonds series 2013A; and
--$36.04 million revenue refunding bonds series 2013B.
The Rating Outlook is revised to Stable.
SECURITY
Debt payments are secured by cash rentals (net revenues of Hurley) made to the Flint Hospital Building Authority, acting through its Board of Hospital Managers, on behalf of Hurley as agreed under the eighth amended and restated contract of lease dated Feb. 1, 2013. Also, there is a fully funded debt service reserve fund.
KEY RATING DRIVERS
IMPROVED OPERATING PERFORMANCE: The upgrade to 'BBB-' from 'BB+' reflects Hurley's dramatically improved operating performance since Fitch's last rating action. Hurley's operating margin jumped to 6.1% in fiscal 2015 (year-ended June 30th) from 0.6% the prior year and negative 1.7% in fiscal 2013. Margin improvement is being driven by a continued focus on expense management, growing volumes, and dramatically reduced bad debt expenses as a result of more patients acquiring health insurance from the state of Michigan's Medicaid expansion.
SHARP IMPROVEMENT IN LIQUIDITY: Hurley's liquidity position and metrics have improved sharply over the last 12 months with unrestricted cash and investments jumping to $112.3 million at June 30, 2015 from $67.8 million at the end of fiscal 2014. Cash growth has been driven by a combination of improved profitability, favorable governmental payment adjustments, reduced capital spending and revenue cycle improvement.
CHALLENGING PAYOR MIX: Fitch's key credit concern reflects Hurley competitive service area and poor socioeconomic indicators which is reflected by a weak payor mix. In fiscal 2015, Medicaid composed a very high 45.5% of gross revenues. However, the expansion of Michigan's Medicaid program provided material financial benefit which has been a key driver in Hurley's operating improvement.
MANAGEABLE DEBT PROFILE: Hurley's debt profile is very manageable with all fixed-rate debt and MADS at 2.7% of fiscal 2015 revenue. Additionally, Hurley's MADS declines by about $5 million or over 40% in 2021, providing cash flow flexibility and potential debt capacity. MADS coverage by EBITDA was very good for the rating category at 4.4x in fiscal 2015 and improved from 1.3x in fiscal 2013.
RATING SENSITIVITIES
SUSTAINED FINANCIAL PERFORMANCE AND POSITION: Fitch expects Hurley to maintain a higher level of operating profitability compared to historical performance. The sharp improvement in liquidity provides sufficient financial cushion to offset Hurley's elevated exposure to changes in reimbursement from governmental payors. While not anticipated, a significant reduction in supplemental payments that would cause margins to return to negative levels could pressure the rating.
CREDIT PROFILE
Hurley is a 443-bed acute care teaching hospital with safety-net provider status located in Flint, Michigan. Hurley had $418.8 million of total revenue in fiscal 2015. A safety-net teaching hospital, Hurley is the only provider in the region of Level I Trauma, Level II Pediatric Trauma and Level III Neonatal Intensive Care, among other services. The medical center has an active outreach effort with many local organizations and is focusing on improving community health.
FINANCIAL PROFILE IMPROVEMENTS
Hurley's liquidity position improved sharply in 2015 with several key liquidity metrics that now meet or exceed Fitch's 'BBB' category medians. At Sept. 30, 2015, Hurley had $133.7 million in unrestricted cash and investments, equal to 124.6 days cash on hand, 11.8x cushion ratio and 143.9% of total debt which are significantly improved from 61.1 days, 5.3x and 55.7%, respectively, at fiscal year-end 2013. Liquidity improvement has been driven by higher earnings, positive governmental payment adjustments and moderating capital spending. In addition, improvements in revenue cycle noticeably reduced accounts receivable balances, with days in accounts receivable declining to 42.6 in fiscal 2015 and 38.6 at September 30, 2015 down from 58.1 in fiscal 2013.
No plans for additional debt coupled with higher margins and modest capital spending should lead to further strengthening of liquidity position over the near term.
Operating performance improved dramatically in fiscal 2015 as Hurley posted a 6.1% operating margin ($25.4 million) in fiscal 2015; only the second year with positive operating margins since fiscal 2010. The operating margin through the three month interim period ending Sept. 30, 2015 remains stable at 6.2% ($6.8 million). The medical center's operating EBITDA margin in fiscal 2015 and the interim period was 11.6% and 11.5%, respectively, both in excess of Fitch's 'BBB' category median of 7.7%. The improved operating performance reflect strong volumes, much lower bad debt expense, management initiative to move care to lower-cost, more convenient settings, and tightly manage expenses. For example, Hurley negotiated new union contracts a few years ago, resulting in meaningful pension cost savings.
DEBT PROFILE
Hurley has approximately $93 million in debt outstanding, which is all fixed-rate. The debt burden is very manageable with MADS equaling 2.7% of fiscal 2015 revenue. MADS of approximately $11.3 million is front-loaded and decreases to about $6.2 million in 2021. MADS coverage by EBITDA was 4.4x in fiscal 2015 and 5.2x through the three month interim period, up from 2.3x in fiscal 2014 and well above Fitch's 'BBB' category median of 2.7x. In fiscal 2015, Hurley implemented GASB Statement No. 68, Accounting and Financial Reporting for Pensions. As a result, the medical center was required to record a $130.94 million net pension liability on its balance sheet. While Hurley's liability profile does not change with the new pension accounting, Fitch notes the dramatic reduction in net assets and weakened debt to capitalization ratio. Regardless, Hurley's favorable adjustments to its defined benefit plans a few years ago provide budgetary certainty and more stabilized funding status. On a positive note, Hurley made advance contributions to fund its Other Postemployment Benefit (OPEB) obligations in fiscal 2015 and also maintains a fiduciary fund with $51.5 million of cash and investments to support operations and moderate its long-term OPEB liability.
A few years ago, Hurley heavily invested in its plant, with capital expenditures averaging a high 181% of depreciation expense from 2012-2014. Capital spending is now more moderate and was only 76.6% of depreciation in fiscal 2015, with similar levels expected for fiscal 2016. Hurley's most recent large capital project was the expansion of its emergency department to account for high volumes that could not be accommodated in its former space. This project was successful and the expansion and redesign have allowed for better patient flow, operating efficiencies and improved patient care.
CHALLENGING ECONOMIC ENVIRONMENT AND PAYOR MIX
Located in Flint, Michigan, Hurley operates in an economically depressed service area with a very challenging payor mix. Payor mix is heavily weighted towards governmental payors with 45.5% of gross revenues derived from Medicaid and 30.6% from Medicare in fiscal 2015. Michigan's Medicaid expansion greatly benefited the medical center as indicated by bad debt expenses dropping to $28.4 million in fiscal 2015, from $51.2 million two years earlier. In fiscal 2015, Hurley received $14.7 million in Medicare disproportionate share funding, $6.7 million in Medicaid disproportionate share monies and about $55.1 million of net supplemental payments, which is approximately a $4.8 million reduction from prior year levels. Hurley's heavy reliance on disproportionate share and supplemental governmental payments remains a credit risk. Regardless, there is some level of certainty for the supplemental funding over the next several years given the likelihood that the state of Michigan obtains its Medicaid waiver extension.
DISCLOSURE
Hurley covenants to provide annual and quarterly disclosure to the Municipal Securities Rulemaking Board's EMMA system.
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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