NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the rating on the following revenue bonds issued by the Washington County Hospital Authority (Pennsylvania) on behalf of Washington Hospital (WH) to 'A-' from 'BBB+':
--$7,040,000 series 2001B variable rate demand bonds (VRDBs);
--$12,975,000 series 2007A VRDBs;
--$21,600,000 series 2007B VRDBs;
--$12,030,000 series 2013A fixed rate bonds.
The series 2001B, 2007A, and 2007B bonds are supported by respective letters of credit (LOCs) from PNC Bank. The 'A-' rating is an underlying long-term rating for all series listed above.
The Rating Outlook is revised to Stable from Positive.
WH also has outstanding $10,205,000 in series 2008A VRDBs supported by an LOC from PNC, which Fitch does not rate but incorporated into the analysis.
SECURITY
The bonds are secured by gross receipts of the hospital and a first-mortgage lien on the hospital's main campus.
KEY RATING DRIVERS
SUSTAINED FINANCIAL IMPROVEMENTS: The upgrade to 'A-' from 'BBB+' is supported by sustained improvement in financial performance despite flat patient volumes and elevated regional competitive pressures in recent years. Reflecting successful execution of expense reduction initiatives, operating EBITDA margin improved to 12.2% in the fiscal year ended June 30, 2015, from 9.1% in 2014 and 8% in 2013. Strong cash flows led to strengthened liquidity, which now compares well against the 'A' medians.
LEADING MARKET POSITION: WH continues to lead the market with 58% inpatient market share in its primary service area (PSA). The next closest competitor, Canonsburg Hospital, holds approximately 12% market share. WH's service area has population, economic and personal wealth trends that compare favorably against state averages; however, the area is fairly competitive with large systems and a concentrated payor base.
GREENE ACQUISITION: Effective July 1, 2015, Washington Health System (WHS) acquired Southwest Regional Medical Center, now operating as Washington Health System Greene (Greene). While Greene's historical profitability is weaker and the transaction is initially dilutive to overall system financials as a result, Fitch believes sufficient synergies exist to benefit both organizations in the medium- to long-term.
TEMPORARY DEBT INCREASE MANAGEABLE: WHS is in the process of issuing a $25 million taxable note to downsize its frozen defined benefit (DB) pension plan and position it for termination. In anticipation, WHS paid off its series 2001A bonds in February 2015. Thus, pro forma debt burden will be minimally impacted and pro forma maximum annual debt service (MADS) is actually projected to decrease by $1 million compared to Fitch's last review. While not required, management intends to pay off the pension debt within a five-year period, which would be essentially cash flow neutral given similar historical contribution levels to the DB pension plan.
MODEST CAPITAL PLANS: Management has no significant planned capital expenditures over the medium term, with annual budget of approximately $12 million.
RATING SENSITIVITIES
GREENE INTEGRATION: Fitch expects WHS to successfully integrate the Greene acquisition into the overall system with minimal impact to the overall financial profile, and sustain MADS coverage at a level consistent with the 'A' rating category.
FURTHER BALANCE SHEET GROWTH EXPECTED: Combination of sound cash flows, limited capital spending, and rapid paydown of pension debt should lead to further balance sheet strengthening in the near- to medium-term.
CREDIT PROFILE
WH is a 260 licensed bed (206 staffed) acute care hospital located in Washington County, which is approximately 36 miles southwest of Pittsburgh. In fiscal 2015, WHS had total operating revenues of $278.5 million. The obligated group, which consists solely of the hospital, accounted for 96.7% of consolidated assets and 86.8% of consolidated operating revenue in 2015. Fitch's analysis is based on the consolidated entity, which includes the hospital foundation and a physician services organization.
Washington Health System Greene Acquisition
Effective July 1, 2015, WHS acquired Southwest Regional Medical Center from RegionalCare Hospital Partners of Brentwood, TN. The 49-bed hospital now operates as Washington Health System Greene, with its results consolidated into WHS financial statements beginning the quarter ended Sept. 30, 2015. Greene's profitability is historically weak (1% EBITDA margin in 2014), but the system should be able to absorb the impacts given its relatively small revenue base ($34.6 million in total operating revenues in 2014).
While most balance sheet metrics remain solid given no associated debt, days cash on hand (DCOH) is considerably reduced from the expanded expense base. However, management is actively executing various strategies to leverage WH's platform in improving efficiency, staffing, and alignment at Greene. Fitch believes WHS will realize the synergies in the near term as Greene extracts efficiencies and generates referrals for WH, leading to DCOH recovery.
Solid 2014 and 2015 Results
Despite mostly flat patient volumes, the momentum in 2014 carried through 2015, generating operating and operating EBITDA margins of 6% and 12.2% in fiscal 2015, respectively, compared to 2.4% and 9.1% in 2014 and 0.7% and 8% in 2013. Rise in profitability was primarily driven by expense reductions from DB plan restructuring and changes to the self-insured health care benefit plan. In fiscal 2015, health care expense decreased by over $4.5 million and pension expense declined by over $1.5 million, reporting a credit of $1 million. Given the further restructuring and near-term funding plans, the expense reduction achieved should be permanent.
Fiscal 2015 was also aided by some one-time revenue items related to cost report and RAC settlements ($3.4 million). Management expects some normalization in 2016, and is budgeting for a lower operating margin of 3.6% for the hospital, which Fitch believes is reasonable.
Dominant Provider in a Competitive Service Area
WH continues to maintain stable market leadership with approximately 58% of inpatient market share in the PSA. In addition, management has been strategically expanding outpatient presence to select secondary service areas. Competition in the greater Pittsburgh area appears to have settled somewhat, though strong forces remain among the two major competitors operating in the region: University of Pittsburgh Medical Center (UPMC, rated 'AA-'; Negative Outlook) and Allegheny Health Network (AHS). WHS expects to continue to collaborate with and remain in both networks, which Fitch views positively.
Pension Funding Transaction
WH's management is taking steps to downsize its sizeable pension liability by offering a certain pool of participants lump sum payouts and improving the funding level of the plan to 95%-100%. In order to mitigate the uncertainty and volatility related to funding a DB pension plan, WHS's DB plan was frozen to all participants by 2010, and most recently reported a funded status of 84.9% (negative $22.9 million). In December 2015, WH expects to complete the issuance of a $25 million taxable drawdown note with First Niagara Bank with a seven-year initial term. Debt service will calculated over a 20-year period for MTI coverage calculation purposes, but management intends to pay off $5 million in principal per year through 2021, at which point the debt will be fully paid off.
The impact on cash flow is projected to be minimal because the debt service on the taxable note will essentially replace the pension contribution that averaged $5.6 million over the last three fiscal years. WH expects to draw on the note in March 2016, at which point the plan will be essentially fully funded.
Stable Liquidity
Liquidity declined slightly over the last year, due to a combination of investment losses and an early defeasance of series 2001A bonds in February 2015. Actual debt service totaled $15.2 million in fiscal 2015 compared to the scheduled debt service of $7.6 million. Annual debt service excluding the pension-related note is estimated over $10 million less in 2015 at $5 million, which should provide cash flow relief.
At FYE 2015, unrestricted cash and investments totaled $122.5 million, equating to 181 DCOH and 179.1% cash-to-debt compared to the respective 'A' medians of 205 days and 143.7%. Cash and investment declined to $114.1 million at Sept. 30, 2015 due to some initial working capital support for Greene. While DCOH decreased to 146.5 days due to the expanded expense base, cash-to-debt remains solid at 175.6%.
Assuming a full draw on the 2016 note, liquidity metrics would weaken to 128.5% cash-to-pro forma debt and 17x cushion ratio, still consistent with the 'A-' rating. As Greene begins to collect revenues and stabilize cash flows, and WH rapidly pays down its debt, liquidity metrics should improve. WH's capital plans are modest, around $12 million annually for routine maintenance and updates, further supporting future liquidity growth.
Solid Debt Ratios Despite Temporary Increase in Leverage
Despite the temporary $25 million increase in leverage, pro forma metrics are expected to remain sound, as the repayment of series 2001A bonds reduced $2.7 million in annual debt service payments. Total pro forma debt outstanding at FYE 2016 is expected to be only slightly higher than at FYE 2013. Coverage of pro forma MADS (calculated under MTI) is 6x in 2015 and 5.8x in 2014, versus the 'A' median of 4.2x. Debt burden remains low with pro forma MADS equating to 2.4% of revenues and debt-to-EBITDA of 2.2x compared to the respective 'A' medians of 2.8% and 3x. Further, cash-to-puttable debt is solid at 226% at FYE 2015, up from 178% at FYE 2013.
DEBT PROFILE
Pro forma debt is estimated at $88.9 million, of which 51% will be fixed rate and 49% will be variable rate (35.8% swapped-to-fixed). WH's outstanding debt will consist of one series of fixed rate bonds, four series of variable rate demand bonds supported by LOCs from PNC, and one taxable note. Pro forma debt service (as calculated under MTI) is declining, with MADS of $6.7 million declining to $5.3 million in 2025. Fitch calculation of MADS incorporates the fixed swap rates on synthetically fixed bonds (series 2007B and 2008A). The swaps had a total mark-to-market of negative $5.2 million at June 30, 2015. WH is not required to post collateral on its swaps.
DISCLOSURE
WH discloses annual financial statements within 120 days and quarterly unaudited financial statements within 60 days through the MSRB EMMA website.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Not-for-Profit Hospitals Rating Criteria (pub. 04 Dec 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=874120
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
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