CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the following Carson City, Nevada health system revenue bonds, issued on behalf of Carson Tahoe Health System (CTHS):
--$47,720,000 series 2012;
--$12,310,000 series 2005*;
--$39,710,000 series 2003B*.
*The 'BBB+' is an underlying rating. The series 2005 and 2003B bonds are secured by irrevocable direct-pay letters of credit with US Bank.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of gross revenues of the obligated group, as well as a deed of trust on the main acute care hospital and property.
KEY RATING DRIVERS
IMPROVED PROFITABILITY: The 'BBB+' rating is supported in large part by a rebound in CTHS's operating profitability, following weaker performance in 2013. On a consolidated basis, CTHS generated a 0.8% operating and 8.2% operating EBITDA margin in 2014, which improved further to 2.1% operating and 8.9% operating EBITDA margin through the nine-month interim period ended Sept. 30, 2015. Improvements were largely due to efforts in reducing unnecessary labor costs, strategic service line growth, and Medicaid expansion.
MODERATE DEBT BURDEN: The rating is further supported by CTHS's manageable debt burden, which is expected to moderate further over the medium term. At Sept. 30 2015, CTHS had a healthy 36.1% debt-to-capitalization and 2.8% maximum annual debt service (MADS) as a percent of total revenue, both favorable to Fitch's 'BBB' category medians. Furthermore, with no plans for additional debt and manageable capital plans near 110% of depreciation, debt moderation is likely over the medium term.
LEADING MARKET POSITION: CTHS operates as a sole community hospital (SCH), as the only acute care provider and with a consistently leading market share above 70% within its primary service area. Limited competitive threat coupled with a sufficiently integrated medical staff is expected to support solid clinical activity going forward, and targeted clinical outreach and growth into the secondary service area should support volume growth and help stem unnecessary outmigration.
REVENUE CONCENTRATION: A key credit concern is CTHS's payor mix, which is 68% governmental payors in interim 2015, and includes approximately $12 million in supplemental Medicare reimbursement provided for its SCH status. While Medicaid expansion was generally favorable, increased exposure to governmental payors limits CTHS's flexibility to absorb any meaningful changes or reductions in reimbursement from these programs
RATING SENSITIVITIES
SUSTAINED OPERATING IMPROVEMENTS: Carson Tahoe Health System (CTHS) is expected to maintain improved operating performance over the near term, given limited capital demands and ongoing expense controls. An unexpected return to weaker profitability or increase in leverage could result in negative rating pressure. Further improvement in operating cash flow which results in meaningful balance sheet strengthening to levels more consistent with the 'A' category could prompt upward rating pressure over the longer term.
SOLE COMMUNITY HOSPITAL FUNDING: Given the significant financial benefit that CTHS derives from its sole community hospital status, any material changes to this program or funding could have a corresponding impact on CTHS's rating.
CREDIT PROFILE
Carson Tahoe Health System is a non-profit system with a total 234 licensed beds, located primarily in Carson City, Nevada. The system includes a 144-bed sole community acute care hospital, a 40-bed psychiatric hospital, physician practices, and a physician hospital organization. Total revenues were $261.1 million in fiscal 2014 (year ended Dec. 31).
Fitch's analysis is based on the consolidated system. The obligated group includes Carson Tahoe Regional Healthcare, which includes the 144-bed acute care hospital and its subsidiaries. At Dec. 31, 2014 the obligated group represented 72% of total revenues and 92.4% of total assets of the consolidated system.
IMPROVING OPERATING PERFORMANCE
Following an uncharacteristic operating loss in 2013, steps taken in 2014 have generated improvements and been sustained into 2015. During 2013, CTHS's performance was hampered by weaker than expected volumes without a corresponding adjustment to staffing or expenses, as well as increased bad debt and relatively weak revenue cycle. CTHS implemented a reduction in force, and significant cost reduction and strategic growth initiatives were put into place. This (coupled with Medicaid expansion) resulted in a significant improvement in labor productivity, clinical volume growth in target areas, and better cash flow. Additional incremental improvement is expected, as CTHS targets a 2% operating margin over the longer term.
Revenue cycle was also a focused effort, with noted improvement. Cash collections vs. net patient revenue improved to 102.3% in 2014 from 98.7% in 2013, and have been maintained at 101.3% through Sept. 30, 2015. In addition, A/R has decreased significantly as accounts are consistently worked down.
MANAGEABLE CAPITAL STRUCTURE
As a result, liquidity growth has remained consistent with revenue/expense growth over the last several years, and is sufficient for the rating level. As of Sept. 30, 2015, CTHS had 143 days cash on hand, 13x cushion ratio, 99.4% cash-to-debt, and 208.5% cash-to-demand debt, all consistent or exceeding Fitch's respective 'BBB' category medians. CTHS has no additional debt plans, and no major capital plans, which should allow for debt moderation over the medium term and support further balance sheet growth.
Fitch notes that CTHS's asset allocation is very conservative with nearly 97% in fixed-income and asset-backed securities. CTHS is evaluating its investment policy and may diversify its investments, which should further aid liquidity growth.
SOLID MARKET PLATFORM
CTHS has maintained leading share within its greater Carson City primary market, supported by a well-aligned (though not generally employed) physician base and very limited competitive presence. While its primary service area generally has weak economic and demographic characteristics, CTHS's ongoing regional growth strategy is expected to diversify its revenue base, as it targets more favorable markets with better indicators and payor mix. In addition, though CTHS's elevated exposure to governmental payors at 68% of its gross revenues (through Sept. 30, 2015) presents some concern, its position as an SCH does provide supplemental reimbursement as well as a solid platform for payor and vendor contracting.
DEBT PROFILE
CTHS has a total $99.7 million in long-term debt outstanding, of which 48% is fixed- and 52% is variable-rate demand bonds supported by a letter of credit which expires Dec. 13, 2019. Approximately $39.7 million (40%) is synthetically fixed with a swap. MADS equals $8.36 million, which includes the bonds and $4.7 million variable-rate note payable.
CTHS's $41 million swap qualifies for hedge accounting, and it had a negative $7.5 million mark-to-market value at fiscal 2014. There are no collateral posting requirements, and the swap is coterminous with the series 2003B bonds on Sept. 1, 2033.
DISCLOSURE
CTHS covenants to provide annual and quarterly disclosure to the municipal securities rulemaking board's EMMA system. Audited financial information is provided within 150 days, and includes financial statements, utilization, payor mix, medical staff, and covenant calculations. Quarterly financial information is provided within 45 days of the close of each fiscal quarter, and includes financial statements and covenant calculations.
Fitch notes that the disclosure covenant applies to the obligated group; however, CTHS has voluntarily provided consolidated information to Fitch for its analysis.
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=999061
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999061
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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