SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to the approximately $18 million Hospital Facilities Authority of the City of Astoria, Oregon hospital revenue bonds, series 2016 issued on behalf of Columbia Memorial Hospital (CMH). In addition, Fitch affirms the 'BBB-' rating on the outstanding series 2012 bonds.
The Rating Outlook is Stable.
The series 2016 bonds will be fixed rate and bond proceeds will provide a project fund of $17.5 million for future capital expenditures, fund one year of capitalized interest and a debt service reserve fund (DSRF), and pay costs of issuance. The series 2016 bonds are expected to price the week of June 20.
SECURITY
The bonds are secured by a pledge of gross revenues of the obligated group, mortgage pledge, and DSRF.
KEY RATING DRIVERS
CONSISTENT CASH FLOW: The 'BBB-' rating reflects CMH's significant revenue growth and very strong and consistent operating cash flow with operating EBITDA margins of 10.9% in 2015 (Dec. 31 fiscal year end) and 13% in 2014. Strong profitability has been driven by outpatient volume and ancillary revenue growth. Further, CMH's clinical affiliation with Oregon Health and Science University (OHSU; rated 'AA-'; Stable) continues to grow and expand to other service lines, which Fitch believes provides greater operating stability given CMH's small revenue base.
SIGNIFICANT INCREASE IN DEBT: With the series 2016 financing, CMH's total debt increases by 70% and balance sheet metrics are weak for the rating level. Negative rating action is precluded at this time due to CMH's consistent strong operating cash flow, its growing relationship with OHSU and the expected benefits from the project financed with the series 2016 bonds. Historical coverage of pro-forma MADS is adequate at 3.1x and 3.3x in 2015 and 2014, respectively.
CRITICAL ACCESS DESIGNATION: CMH's critical access hospital (CAH) designation is a key rating factor, which provides enhanced reimbursement and somewhat mitigates risks inherent to small rural facilities.
WEAK BALANCE SHEET: Liquidity metrics at March 31, 2016 include 121.1 DCOH and pro forma cash-to-debt of 55.9%, which are weak for the rating level and for a credit with a small revenue base. However, Fitch expects liquidity metrics to improve fairly rapidly as the majority of its capital needs are funded with debt. This should allow for liquidity growth due to ongoing strong cash flow as well as expected benefits from the project.
COMPETITIVE SERVICE AREA: CMH operates in a service area which is more competitive and dynamic than most rural providers. As a result, CMH's inpatient market share has been stable near 30% since 2004, which is low compared to Fitch's other CAH peers. Fitch believes this concern is mitigated by CMH's growing relationship with OHSU which enhances CMH's reputation and expands its clinical services.
RATING SENSITIVITIES
REALIZATION OF BENEFITS FROM PROJECT: Fitch expects Columbia Memorial Hospital to realize the financial and clinical benefits from the cancer center project over a short period of time, offsetting the impact of the additional debt. The failure to sustain strong operating cash flow or improve liquidity would likely result in negative rating action.
CHANGES TO CAH PROGRAM: Any material changes to the critical access hospital program and the current favorable reimbursement methodology would likely result in negative rating pressure. There are no indications of any changes in the near term but it remains an ongoing credit concern.
CREDIT PROFILE
CMH owns and operates a 25-bed CAH (49 licensed) and other health care facilities in Astoria, Oregon (almost 100 miles northwest of Portland), serving northwest Oregon and southwest Washington. The hospital is the only member of the obligated group. Fitch's analysis is based on the consolidated entity, which includes Columbia Memorial Hospital Foundation (foundation), and a 51% controlling interest in a joint venture, Astoria Imaging. The hospital accounted for 96% of total assets and 98% of total revenue of the consolidated entity in 2015. CMH had total revenue of $93.5 million in 2015.
GROWING OHSU RELATIONSHIP
Since 2010, CMH has had a clinical affiliation with OHSU in oncology. This was extended to cardiology in 2011 and since 2011 has continued to grow, with the most recent addition being the staffing of the emergency department, which is covered by OHSU physicians since 2015. This clinical affiliation in addition to ongoing physician recruitment has allowed CMH to offer more services locally. There are currently 14 OHSU physicians working full time at CMH.
In 2015, CMH entered into a joint operating agreement (JOA) with OHSU, which expands upon the existing oncology relationship by adding radiation therapy services. Patients are currently traveling over 60 miles away for radiation therapy services. A portion of the series 2016 bond proceeds will fund the construction of the cancer center, which will be branded as CMH-OHSU Knight Cancer Collaborative.
The debt issuance and capital plan is higher than what was expected from Fitch's last review in August 2015 mainly due to the increased size and scope of the cancer center project. The cancer center project will cost $16.5 million with a portion to be funded by philanthropy and OHSU. The foundation is in the process of raising $3 million for the project ($2 million already raised). Construction will begin in July 2016 and is expected to be complete by October 2017.
Fitch views the project favorably as the cancer center project expands upon CMH's current relationship with OHSU for oncology services and will provide radiation therapy services, which is not currently offered locally. The total projected volume and revenue from these services is sizeable with over $20 million in net revenue in the first full year of operations.
Overall, Fitch views the relationship with OHSU positively, as it has supported CMH's growth and helped to stem unnecessary outmigration. CMH's revenue base has grown 35% from 2012-2015 and its total revenue base is on pace to exceed $100 million in 2016. This relationship helps to offset the unusually high level of competition from area acute care providers within CMH's service area.
VOLUME GROWTH AND OTHER CAPITAL NEEDS
CMH also continues to grow its employed physician base through the CMH Medical Group, which currently has 30 physicians and mid-level providers. Volume growth has been very strong especially in outpatient services and increased surgeries with a new general surgeon as of fall 2015. Urgent care and surgical cases were up 37% and 8.1%, respectively, in 2015 compared to 2014 and up 31% and 5.8% in the three months ended March 31, 2016 compared to the same prior year period.
After the cancer care project, CMH has plans to renovate and expand its emergency room. The project is still in the design phase, but will begin after the cancer care project is complete and is expected to cost $3 million to $5 million. This project is expected to be funded from the series 2016 bond proceeds.
There are no other major capital needs with ongoing capital spending projected at approximately $4 million a year.
STRONG PROFITABILITY
Since Fitch's initial rating of 'BBB-' in 2012, CMH has demonstrated consistent strong profitability due to its favorable reimbursement, volume growth, expanded services, and continued physician recruitment. Operating and operating EBITDA margins were 4.9% and 10.9%, respectively, in 2015, 6.4% and 13.5% in 2014, 5.8% and 12% in 2013 and 7.7% and 13.5% in 2012. Operating performance declined in 2015 mainly due to one-time consulting expenses related to reducing its accounts receivables (AR). Through the three months ended March 31, 2016, operating and operating EBITDA margins were 7% and 12.6%, respectively.
WEAK BALANCE SHEET
Since an information systems conversion in 2014, CMH had a sharp increase in accounts receivable and the correction took longer than expected and required a consultant engagement in 2015. A new revenue cycle director starts in June 2016 and management expects DCOH to improve to at least 120 by FYE 2016. Gross days in AR were 57.2 at March 31, 2016, compared to 61.2 at Feb. 29, 2016, 63.7 at Dec. 31, 2015, 93.8 at Dec 31, 2014, and 60.6 at Dec. 31, 2013. The targeted goal is under 55 days. Collections-to-net revenue have also improved prior to the conversion and were 96.5% at March 31, 2016.
Fitch expects liquidity to improve due to continued progress with AR, the funding of major capital needs with debt, maintenance of strong operating cash flow, and benefits from the cancer center project. The failure to improve liquidity in the near term would likely result in negative rating pressure.
DEBT PROFILE
Total pro forma debt (includes current portion) after the series 2016 issuance totals $50.1 million and is 100% fixed rate. Debt service is relatively level and MADS increases to $3 million from $2.1 million. Historical coverage of pro forma MADS was 4.1x through the three months ended March 31, 2016, 3.1x in 2015, and 3.3x in 2014, and does not include additional revenue to be generated from the debt-financed projects. Per bond covenant calculations, CMH had 4.12x debt service coverage in 2015. CMH's financial covenants include 1.25x debt service coverage and 50 days cash on hand.
DISCLOSURE
Annual disclosure will be made within 150 days of fiscal year end. Historically, CMH has not been providing quarterly disclosure to the Municipal Securities Rulemaking Board's EMMA system. With the series 2016 issuance, quarterly disclosure will be added to the continuing disclosure agreement.
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=1005862
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005862
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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