SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A-' rating on the following Baptist Health Care Corporation's (BHCC) outstanding debt:
--$144 million Escambia County, FL health facilities authority revenue bonds (Baptist Hospital Inc. Project) series 2010A.
The Rating Outlook is Stable.
SECURITY
Security interest in certain pledged revenues, mortgage pledge on Gulf Breeze Hospital, and debt service reserve fund.
KEY RATING DRIVERS
SUSTAINED FINANCIAL PERFORMANCE: BHCC has maintained solid operating performance since the rating upgrade in February 2015 to 'A-'. The strong operating results continue to reflect BHCC's excellent management practices, execution on its strategic initiatives to capture volume in specialty service lines, as well as continued focus on reducing costs. Operating and operating EBITDA margins were 3.6% and 8.2%, respectively in fiscal 2015 (Sept. 30 fiscal year end). BHCC's performance through the three months ended Dec. 31, 2015 is very strong and well in excess of budget with an operating margin of 4.6% and operating EBITDA margin of 8.9%. Performance improvement initiatives in fiscal 2016 focus on throughput and clinical documentation.
LEADING MARKET POSITION: BHCC is located in a competitive area with two major competitors: West Florida Hospital (part of HCA) and Sacred Heart Hospital (part of Ascension Health; rated 'AA+'). BHCC has historically had the second market position, but after implementing a strategy anchored in physician alignment to shift market share in specialty services BHCC has now been the market leader (based on total adult admissions) for three consecutive years as well as maintaining the leading market share in key service lines including orthopaedics, heart and vascular, and neurosciences. Fitch views this as impressive and believes it reflects BHCC's effective management practices.
EFFECTIVE MANAGEMENT PRACTICES: BHCC's management practices are highlighted by its successful execution of strategic initiatives and track record in meeting or exceeding budgeted targets. BHCC also maintains a culture centered on employee engagement and service.
FRONT LOADED DEBT SERVICE SCHEDULE: With the use of note payables and capital leases, BHCC's debt service coverage is pressured due to its front loaded debt structure. MADS is $19 million and reduces every year. MADS coverage was adequate at 3.1x in fiscal 2015 compared to the 'A' category median of 4.2x.
CAPITAL NEEDS: Capital spending over the next two years is higher than normal due to the replacement of its electronic medical record (EMR), which will be Allscripts. A portion of the capital plan will be funded by a $22 million loan from Allscripts, which will be reflected as an increase in other long term liabilities. There are no additional debt plans; however, a master facility assessment is underway.
ADEQUATE LIQUIDITY: BHCC's liquidity position has historically been weak but has significantly improved since fiscal 2012 due to good cash flow, sale of non-core assets, and a reduction in accounts receivable. BHCC had 152.8 days cash on hand and 132.2% cash to debt at Dec. 31, 2015 compared to the 'A' category medians of 205.3 and 143.7%, respectively.
RATING SENSITIVITIES
ELECTRONIC MEDICAL RECORD IMPLEMENTATION: Operating performance in fiscal 2017 is likely to be compressed due to significant training costs related to its electronic medical record implementation. Fitch believes the rating can withstand a temporary dip in performance as benefits from the project are realized over the longer term. However, a material increase in debt or sustained decline in debt service coverage ratios would likely result in negative rating pressure.
CREDIT PROFILE
BHCC operates Baptist Hospital, a 492-bed tertiary care hospital in Pensacola, FL; Gulf Breeze Hospital, a 77-bed acute care hospital in Gulf Breeze, FL and Jay Hospital a 55-bed hospital in Jay, FL as well as other health care related entities. BHCC disaffiliated with Atmore Community Hospital effective May 2015 and its performance is reflected as discontinued operations for fiscal 2014 and 2015. Total operating revenue in fiscal 2015 was approximately $723 million. BHCC won the Malcolm Baldrige National Quality Award in 2003 and is an indicator of the organization's culture and high quality and safety standards.
LEADING MARKET POSITION
Since 2012, BHCC has maintained the leading market position in its service area. Market share has increased to 37% in June 2015 from 34% in September 2010 while its main competitor, Sacred Heart's market share has dropped to 34% from 39% over the same time period. However, on a service line basis, BHCC's market share position is much stronger with a larger differential compared to Sacred Heart especially in orthopaedics and heart and vascular. Specifically, Fitch views BHCC's creation of the 'Andrews Institute' in partnership with world-renowned orthopaedic surgeon Dr. James Andrews favorably. This relationship dates back to 2006, and, since that time the orthopaedic service-line profitability has more than doubled. The Andrews Institute has a regional and national draw and further growth especially of Andrews Institute Rehabilitation sites is expected.
BHCC's focus on shifting volume in these key service lines started with physician alignment and a more recent initiative is in neuroscience and other service line strategies are expected in the near term. BHCC has a medical group with a total of 230 employed physicians in various specialities and includes 70 primary care providers and 32 hospitalists. Other strategies include continuing to improve access with two ambulatory sites planned to open in 2017.
In July 2013, BHCC became a member of the Mayo Clinic Care Network (Mayo), which provides certain benefits such as co-branding and physician integration tools. Fitch views this relationship favorably as BHCC is the only Mayo affiliate in the Gulf Coast region, which extends approximately 150 miles.
SOLID OPERATING PERFORMANCE
Operating performance has been consistently solid and excluding one-time gain on sales, operating margin was 3.6% ($26.1 million operating income) in fiscal 2015, 3.3% in fiscal 2014 and 3.9% in fiscal 2013. Through the three months ended Dec. 31, 2015, operating margin was 4.6% compared to the A category median of 3.6%. Operating performance has been driven by solid volume growth especially surgical volume, higher acuity, improved payor mix, as well as continued focus on cost reductions.
One-time items included the sale of the Baptist Leadership Group for $8.5 million in September 2013, the Manor (a 170 unit skilled nursing facility) for $11.3 million in November 2013 and Baptist Life Flight for $2.8 million in May 2014. Including these gain on sales (recorded in other operating revenue in audited financials), operating margin in fiscal 2013 and 2014 would be 5% and 5.1%, respectively.
In fiscal 2016, management is budgeting for a 2.5% operating margin, which Fitch views as conservative as it excludes certain initiatives underway including improved throughput and better clinical documentation. Fiscal 2017 performance is likely to be compressed due to an increase in training and other costs related to its EMR implementation, which is projected to total almost $23 million in fiscal 2017. However, savings are also expected due to replacement of the legacy systems, which is estimated at $5 million for fiscal 2017.
BHCC's revenue base is diverse with 18.3% of net revenue related to vocational services. The vocational services are provided by individuals with disabilities and BHCC maintains contracts with governmental entities for these services. This service line is profitable and if a contract did not get renewed, the expenses should decline accordingly.
EMR IMPLEMENTATION
BHCC has chosen Allscripts as its vendor for its replacement electronic medical record, which will include standardization across services lines and physician practices, centralized scheduling, revenue cycle management tools, data analytics, and population health capabilities. The capital spend is projected to total approximately $40 million over the next five years (majority of spend in FY 2017) with a go live date in March 2017. Allscripts is also providing BHCC financing for the project ($22 million 10 year interest free loan). This will be reflected as an increase in other long term liabilities.
Total capital spend is fairly moderate at $151 million over the next five years with higher spending in FY 2016 and 2017 related to the EMR and capital spending dropping to 1x depreciation expense in the latter years. However, there is a master facility assessment underway.
DEBT PROFILE
As of Sept. 30, 2015, total outstanding debt was approximately $226 million and includes $154 million of bonded debt, $51 million of notes payable, and $21 million of capital leases and other debt. The debt profile is 71% fixed rate and 29% variable rate. Given the high proportion of shorter maturity debt vehicles, BHCC's debt service schedule is front loaded. MADS is $19 million and reduces every year. There is a bullet payment in 2020, which is smoothed according to BHCC's master trust indenture for covenant calculations.
BHCC has three outstanding swaps for a total notional amount of $60.4 million and includes a basis swap with Citi for $40 million and two floating- to fixed-rate swaps with Bank of America for $15.2 million. BHCC is required to post collateral at its current rating level if the mark to market exceeds $5 million per counterparty. To date, BHCC is not posting any collateral.
MADS coverage by EBITDA was 3.1x in fiscal 2015, 3.0x in fiscal 2014 and 3.4x in fiscal 2013. With the strong performance through the three months ended Dec. 31, 2015, MADS coverage was 3.5x. MADS as a percentage of revenue was 2.7% in fiscal 2015, still relatively low despite the front loaded debt structure and was below Fitch's 'A' category median of 2.8%.
DISCLOSURE
BHCC covenants to provide annual audits within 150 days of fiscal year end and quarterly unaudited financials for the first three quarters within 45 days of quarter end.
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
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001906
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