NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on approximately $95.3 million of Indiana Finance Authority's series 2010 hospital revenue bonds issued on behalf of King's Daughters' Hospital and Health Services(KDH).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by all accounts, including accounts receivable, as well as a mortgage on the property and a debt service reserve fund.
KEY RATING DRIVERS
SOLID OPERATING RESULTS: KDH's fiscal 2015 financial results built on the improved performance achieved in 2014. The higher level of operations in 2015 was partly due to the receipt of disproportionate share (DSH) funds and other one-time items. While 2016 and 2017 may not yield similar margins to 2015, the hospital is still performing at a stronger operating level than it has in recent years.
ROBUST LIQUIDITY EXPECTED TO GROW: Higher EBITDA generation coupled with low capital expenditure has facilitated year-over year liquidity growth. Days cash on hand (DCOH) measured 315.7 days at fiscal end 2015 ($93.7 million) and increased to 337.2 days as of June 30, comfortably above the 161.5 day category median.
LIMITED SERVICE AREA COMPETITION: KDH's limited competition in its service area helps offset concerns about the hospital's smaller revenue size and geographic concentration. Although its closest competitors are critical access hospitals and its main competitors are across the Ohio River in Kentucky, KDH's 46.7% market share indicates some market fragmentation in the service area.
MODERATING DEBT RATIOS: As liquidity and profitability have increased, KDH's debt load has moderated. Maximum annual debt service (MADS) still represents a high 5.4% of fiscal 2015 revenue, although MADS coverage improved significantly to 4.6x in 2015 from 3.0x in 2014. Cash-to-debt also improved to 96.3% in 2015 and 105.5% as of June 30, 2016 from 76.4% in 2014, and is now in line with peers in the rating category.
RATING SENSITIVITIES
SUSTAINABILITY: Fitch expects that King's Daughters' Health (KDH) will continue to grow its unrestricted cash cushion while debt ratios moderate further, key metrics given the inherent challenges faced by smaller providers. Upward rating movement would require consistent steady balance sheet improvement to levels above 'A' category medians, as an offset to possible future volatility in operating cash flow.
CREDIT PROFILE
KDH is an 86 licensed bed acute care facility located in Madison, Indiana, approximately 90 miles southeast of Indianapolis and about 60 miles northeast of Louisville, Kentucky. In fiscal 2015, KDH had $134.2 million in total revenue.
RECORD PROFITABILITY IN 2015
KDH achieved a 9.9% operating margin and an extremely high 23.3% operating EBITDA margin in 2015. Operations were already at an elevated level as a result of turnaround initiatives that led to a significant financial recovery in 2014, including a labor reduction, improved revenue cycle processes and service line expansions. In addition to this improvement, KDH received and recorded $6.4 million in DSH funds in 2015(for services provided during the state fiscal years 2014 and 2015), $1.5 million in Hospital Assessment fees and $1 million in non-recurring reserve adjustments and cost report settlements.
The hospital expects to record only $1.5 million in DSH in fiscal 2016. The amount of DSH funds that the hospital will receive for volume in 2016 is not yet known or accrued and it is not expected to be recorded until 2017. Consequently, management expects that year-end results for 2016 will be lower than 2015 partly due to the unevenness of DSH receipts. In addition to DSH, KDH also receives additional Medicare reimbursement as a sole-community provider. Revenue from these programs is expected to be relatively stable over the next couple of years, although KDH's vulnerability to cuts in supplemental funding continues to be a credit concern.
The hospital also benefited from Indiana's Medicaid expansion in 2015. As a result, self-pay declined to 3.4% in the six months of fiscal 2016 from 6.8% in fiscal 2013.
MARKET SHARE STRATEGIES
KDH'S primary service area market share has been relatively stable in recent years with 46.7% market share in 2015 compared to 48.3% market share in 2013. After KDH, the largest market share portion belongs to Norton Hospital-Louisville with 7.4%. The rest of the area's inpatient healthcare volume is divided by a number of hospitals located in KDH's secondary service area. KDH has a clinical affiliation with Norton in oncology.
Consistent with a larger trend, KDH's inpatient volume has been relatively flat over the past couple of years but it has benefited from modest growth in several outpatient ancillary services and procedures. Special procedures decreased in the current fiscal 2016 because of the temporary closure of KDH's Outpatient Pain Clinic during the first quarter due to issues with physician coverage (highlighting the type of risk at smaller single-site providers), but this volume has begun to recover with the re-opening of the clinic in the second quarter. Oncology volume, which was strong in 2015 after the opening of a new cancer center, has also decreased in 2016.
KDH's market strategies include employing more specialists in the secondary service area (KDH employs 41 physicians and 13 clinical practitioners) and certain higher-margin service line expansions.
IMPROVING DEBT PROFILE
KDH has a conservative debt profile with all fixed-rate debt, no pension liability, and no swap arrangements. KDH's recently leveraged position stemmed from financing the replacement hospital facility that was completed in 2013. However, as outstanding debt decreases and operating EBITDA increased, debt service coverage improved significantly to 4.6x in 2015 from 1.7x in 2013. Debt to capitalization also strengthened to 41.3% in 2015, favorably below the category median of 48.1% for the 'BBB' rating. KDH's debt metrics are now all in line with the 'BBB' rating with the exception of MADS as a percent of revenue, which continues to be high at 5.4%.
DISCLOSURE
KDH covenants to provide bondholders with annual disclosure within 150 days of the close of each fiscal year and quarterly disclosure within 60 days of each quarter end.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/site/re/866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010804
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010804
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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