NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'BBB' rating on the following revenue bonds, issued on behalf of Mississippi Baptist Health System (MBHS):
--$50,725,000 Mississippi Hospital Equipment and Facilities Authority revenue refunding bonds, series 2015 A;
--$87,045,000 Mississippi Hospital Equipment and Facilities Authority revenue bonds, series 2007A.
The Rating Outlook is revised to Negative from Stable.
SECURITY
Debt payments are secured by a pledge of gross revenues.
KEY RATING DRIVERS
CONTINUED OPERATING LOSSES: The revision of the Outlook to Negative is driven by MBHS's failure to stem the sizeable operating losses of the last three years. Recent losses are related to the difficulties with MBHS' current Paragon Electronic Health Record (EHR) installed in 2014, which has been a barrier to implementing certain efficiency initiatives. The acquisition of two critical access hospitals (CAHs) and other unbudgeted expenses also contributed to MBHS' suboptimal performance in 2015. While improved over prior year, MBHS' operating results failed to meet budget in fiscal 2015 (year-end Aug. 31) with a $23.4 million operating loss (negative 5.1% operating margin), and continue to trail budget at a negative 3.4% operating margin through the three-month 2016 interim period ended Nov.30 2015.
POTENTIAL IMPACT OF REPLACING PARAGON: Management is in the process of evaluating next steps in choosing a new EHR, an essential tool in working to reduce length of stay which currently is a key source of operating inefficiency at more than one day longer than management's target. The cost of the new EHR will not be immaterial and, depending on source of funding, will likely either negatively impact liquidity or increase leverage.
IMPROVED BUT MODEST COVERAGE: MBHS' debt burden remains somewhat elevated for the rating category with maximum annual debt service (MADS) of $18 million equal to 3.9% of total revenues in fiscal 2015, compared to Fitch's 'BBB' category median of 3.6%. In addition, compressed profitability resulted in relatively modest MADS coverage by earnings before EBITDA of 2.1x in fiscal 2015, lower than the category median of 2.7x, though improved from 1.4x in the prior year.
DECLINE IN LIQUIDITY: MBHS' liquidity metrics have deteriorated from prior years reflecting high capital spending and weaker operating cash flow, as well as lower portfolio returns in 2015. Unrestricted cash and investments decreased to $179.2 at Nov. 31, 2015, from $197.3 million in 2014, equating to 132.4 days cash on hand (DCOH), 10x cushion ratio and 68.5% cash-to-debt, all lower than Fitch's 'BBB' median ratios. Additionally, the swap provider recently exercised its right to lower the collateral posting threshold requirement on the $80 million swap, based on MBHS' rating, to $5 million from $20 million, resulting in the need to post an additional $13 million of collateral. This reduced unrestricted cash to an estimated $166 million as of Feb. 26, 2016, equal to an estimated 122 DCOH.
STABLE MARKET SHARE: MBHS has maintained a stable market share based on solid inpatient and outpatient volumes. Admissions to Mississippi Baptist Medical Center (MBMC) increased by 3.8% in 2015 and are a further 4% ahead for the first quarter of 2016 (1Q16) compared to the same period last year. The market share does not fully reflect the full impact of the regional growth strategy, with two of the three CAHs in the system for less than a year. Also viewed positively was the October 2015 acquisition of the Jackson location of the 16-physician strong Premier Medical Group, which is expected to expand through targeted recruitment.
RATING SENSITIVITIES
NEED TO IMPROVE OPERATING PERFORMANCE: Mississippi Baptist Health System must stabilize operations leading to a material reduction in operating losses. Given the recent decline in liquidity coupled with the expected need for increased capital outlay, further negative rating action is likely absent meaningful improvement in operating results.
CREDIT PROFILE
MBHS operates a 435-staffed-bed hospital in Jackson, MS and three critical access hospitals: Baptist Medical Center Yazoo (Yazoo City, MS), Baptist Medical Center Leake (Carthage, MS) and Baptist Medical Center Attala (Kosciusko, MS); the Yazoo and Attala hospitals were added to the system in 2015. MBHS and its two largest competitors - Saint Dominic and University Medical Center split the bulk of the PSA market share about equally. MBHS' total operating revenues equaled $461.3 million in fiscal 2015, an 8% increase from 2014.
CONTINUED OPERATING LOSSES
While operating performance in 2015 was somewhat better than in the prior year, the system still recorded an operating loss of $23.4 million, compared to the $35.5 million loss in 2014 (Fitch's methodology includes depreciation and amortization expenses related to medical office buildings (MOBs) in operating income, which differs from MBHS' reporting format where these are reported as non-operating expenses). The system budget for 2015, adjusting for the MOB operating expense was a loss of approximately $5 million. The operating loss recorded for the 1Q16 was $4.4 million, compared to $1.8 for the same period last year, though prior year included EHR meaningful use moneys of $3 million, with the $1.6 million of 2016 meaningful use funds received in February 2016.
After significant management turnover in the past, the new management team has been in place for 18 months and is working on implementing a financial stabilization plan. A serious obstacle to gaining improvement in efficiency metrics has been the Paragon EHR, which was brought on line in 2014. Particularly frustrating was the inability to reign in the length of stay; reducing the length of stay by just over a day was identified as having a potential $30 million benefit, half of which had been included in the 2015 budget, but none realized. Management is now working with the medical staff on reducing length of stay, but it is evident that the EHR will need to be replaced at a considerable additional cost to the system and creates further concern about implementation. Additional factors contributing to the 2015 operating loss were the integration of the two CAHs into the system, as well as the acquisition of a large cardiology group. Fitch notes that two of the CAHs were funded with New Market Tax Credits, which require accelerated depreciation treatment.
The system budget for the current fiscal year is a loss of approximately $8 million including the MOB depreciation and amortization in operating expenses. The loss includes the further negative drag of integrating the CAHs, and the added expense of the employed Premier Medical Group. Management is taking a number of additional steps to improve performance and stabilize liquidity, including leasing the system's long-term acute care facility to an outside operator, which would reverse a loss to a small gain, and considering sales and leasing strategies of medical office buildings and other properties that could potentially raise $10 million-to $20 million in cash or reduce attendant losses.
EXPANSION OF FOOTPRINT
Continuing its alignment with CAHs in order to create a regional network intended to expand its referral base, MBHS completed the acquisition of Kings Daughters Hospital in Yazoo in February 2015 and, in June 2015, MBHS purchased the 25-bed Monfort Jones Memorial Hospital in Kosciusko by assuming the debt service on its outstanding debt. Both the Attala facility and BMC Leake, which was acquired in 2011, have brand-new facilities. In order to accelerate the integration of the new facilities and improve operating results, management has outsourced management of the three CAHs to a private company that specializes in management of community hospitals, though an operating loss is still budgeted for 2016 for this sector. An effort to acquire physician practices in those markets is underway in order to improve patients' access to care. MBMC reports seeing an increased number of referrals from these facilities.
DEBT PROFILE
MBHS had approximately $262 million of debt as of Nov. 30, 2015, of which 36% is variable rate. Coverage of the $18 million of MADS by EBITDA was 2.1x in fiscal 2015, slightly lower than Fitch's 'BBB' median of 2.7x, but better than the 1.4x coverage in 2014. MADS as a percent of revenues has been moderating over time and at 3.9% is now closer to the category median of 3.6%. MBHS has a relatively frontloaded debt service, with MADS dropping precipitously starting with 2037 to $3 million. The system has one fixed payor swap with a notional par of $80 million with a mark-to-market of negative $29.8 million as of Feb. 26, 2016 and is required to post collateral of approximately $23 million.
NEED FOR INCREASED CAPITAL SPENDING
MBHS' capital spending had been robust over the last several years and the renovation project on its main hospital campus will be completed this fiscal year, with all of its patient towers having been renovated to date and two of the three CAHs having newly replaced facilities. While the routine capital expenditures will stabilize at under $30 million, less than depreciation expense, the need to replace the EHR will require a substantial additional investment. The timing of that investment, which is deemed to be essential, is not yet finalized, but management has stated that the implementation will only be undertaken once operations have stabilized. The capital budget for the current fiscal year is $27 million.
DISCLOSURE
MBHS covenants to provide annual and quarterly disclosure. Disclosure is provided through 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
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1000256
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000256
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.