CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating for the following Grundy County Industrial Development Authority (MO) debt issued on behalf of Wright Memorial Hospital (WMH):
--$27 million health facilities revenue bonds, series 2009.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of the unrestricted receivables of the JB Wright Trust (the Trust, owner of WMH and obligor on the bonds), a debt service reserve, and a mortgage lien on hospital property. The bonds are payable primarily from lease payments received by the Trust from Saint Luke's Hospital of Trenton (SLHT), a wholly-owned subsidiary of Saint Luke's Health System (SLHS). SLHS guarantees these lease payments by SLHT.
KEY RATING DRIVERS
SAINT LUKE'S AFFILIATION IS KEY STRENGTH: The 'BBB-' rating is based primarily on WMH's relationship with SLHS, via an operating agreement with SLHS's wholly-owned subsidiary SLHT. SLHT has operated WMH since 1995 via the agreement, which affords WMH many benefits including a guaranty of lease payments of no less than debt service on the series 2009 bonds through 2023.
OPERATING STRUCTURE RISK: The guaranty and operating agreement does not extend through the maturity of the bonds (2034), which Fitch views as a credit risk. The current term of the operating agreement is through 2023 with automatic five-year renewal periods. After the initial term, SLHS can terminate the lease with a one-year notice unless there is an event of default.
IMPROVED CASH: As expected, WMH settled three outstanding cost reports in 2015 which helped to increase cash. Unrestricted cash was $3.6 million at fiscal 2015, equal to 44.9 days of cash on hand (DCOH) and 12.8% cash to debt. Incremental improvement in fiscal 2016 is expected from additional settlement payments and ongoing work to reduce accounts receivables (A/R).
WEAKER PROFITABILITY: Despite some improvement in clinical volumes, WMH's profitability slipped in 2015 due to higher expenses related to expanded oncology services, and other operating expense growth. WMH produced a 10.3% operating EBITDA margin, behind the 12.7% generated in 2014. Some volume pressure in the three month interim period is suppressing profitability in interim 2016, though additional physicians starting in the fall are expected to help generate some revenue growth in the last quarter.
RATING SENSITIVITIES
CONTINUATION OF OPERATING AGREEMENT: WMH's investment grade rating assumes the extension of the operating agreement beyond its current 2023 term, and ongoing relationship with SLHS. Any change in this relationship would likely result in negative rating action.
CREDIT PROFILE
WMH is a critical access hospital located in Grundy County, approximately 85 miles northeast of Kansas City, Missouri. Other services include outpatient clinics, inpatient and outpatient surgery, and a rehabilitation program. Total revenues in 2015 were $30.4 million, of which $2.6 million relates to the Trust and is primarily lease income from SLHT. Fitch's financial analysis is based on the combined financials of the Trust and WMH.
AFFILIATION WITH SLHS
The key rating factor supporting the 'BBB-' rating continues to be WMH's affiliation with SLHS, via an operating agreement which provides for significant benefits including strategic support, management expertise, contract leverage, and a guaranty of lease payments to the Trust equal to debt service requirements on the series 2009 bonds. The guaranty exists in conjunction with the operating agreement, which now runs until 2023, with five subsequent automatic renewal periods of five years each.
Although this guaranty is not secured under a master indenture note, it acts as a guarantee by SLHS of debt service payments through 2023 (the bonds mature in 2034). While not publicly rated by Fitch, internal analysis of audited fiscal 2006-2015 and three-month interim 2016 data confirmed SLHS' solid credit profile.
IMPROVING LIQUIDITY
As anticipated, WMH benefitted from the settlement of three Medicare cost reports in fiscal 2015, which helped bolster its cash levels to $3.6 million ahead of $2.1 million in fiscal 2014. In addition, work to reduce days in A/R in fiscal 2016 coupled with two potential additional cost report settlements and stronger operating cash flow should result in additional balance sheet growth in fiscal 2016 and into fiscal 2017. WMH maintains a very conservative capital structure, with 100% fixed rated debt, no exposure to equities, and no pension risk.
DIP IN PROFITABILITY
Profitability was squeezed in 2015 by expense growth. Expenses were up in part due to strategic growth in key services, including oncology and the acquisition of a primary care clinic in Mercer. Further expense pressure is likely as WMH pursues a joint Hospitalist program with Hedrick Medical Center, and looks for other opportunities to add specialists to the service area. Based on hospital-only financial performance, WMH will likely finish behind its modest 1.2% operating margin budget for 2016, but may still outperform its slight (0.5%) operating loss in 2015. Still, the addition of a surgeon and an ENT physician should bring offsetting revenue growth in the last quarter of 2016 and into 2017.
DEBT PROFILE
WMH has $27 million in long-term, fixed-rate debt outstanding, maturing in 2034. Maximum annual debt service (MADS) equals $2.5 million, and debt service is level. WMH is not counterparty to any derivative instruments.
As long as the operating agreement is in the place, the Trust is not subject to a rate covenant on the bonds.
DISCLOSURE
WMH covenants to provide audited annual financial statements 180 days after the year-end close and quarterly disclosure 45 days after the quarter close to bondholders via the Electronic Municipal Market Access system (EMMA). Annual disclosure will consist of a balance sheet, income statement, medical staff, revenue sources, and utilization statistics. Fitch has had good access to WMH management, including representative leadership from SLHS and the Trust.
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=1008924
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008924
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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