CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to the following California Statewide Communities Development Authority revenue bonds, issued on behalf of Redlands Community Hospital (RCH):
--$89.8 million series 2016.
The series 2016 bonds are being issued as fixed rate, and used to fund capital expenditures, refinance the existing series 2013 privately placed variable rate bonds, fund the termination of a swap, and to pay costs of issuance. The bonds are expected to price the week of October 31 via negotiation.
The Rating Outlook is Stable.
SECURITY
--Pledge of obligated group gross receivables.
KEY RATING DRIVERS
Manageable Debt; Favorable Structure: With the series 2016 issuance, RCH will move from a 100% variable rate debt mix, to 100% fixed rate committed capital. Further, pro forma debt service requirements will remain very manageable, as evidenced by 3.6x coverage of pro forma MADS by operating EBITDA and pro forma MADS equaling just 1.9% of total revenue through 10-months interim period ended July 31, 2016.
Improved Liquidity: RCH's liquidity improved materially in 2016, driven by diligent work on accounts receivable and solid cash flow. As of July 31, 2016 RCH had 190.4 days of cash on hand (DCOH) and a 25.6x pro forma cushion ratio, both consistent with Fitch's 'A' category medians of 215.5 DCOH and 19.4x cushion ratio. Pro forma cash to debt is a healthy 163% at July 31, 2016. While meaningful growth may be hampered by increased capital spending, Fitch expects liquidity to remain relatively stable over the near term.
Favorable Payor Mix: A key credit strength is RCH's favorable payor mix, with very limited exposure to government payors (38% of gross revenues through July 31, 2016). Further, RCH has long-term experience and success with capitation, which should prepare it well for shifting reimbursement going forward.
Sufficient Profitability: RCH's cash flow is marginal against Fitch's 'A' category medians, but adequate for its level of debt service and capital needs. Further, improvement to core efficiency is expected to help sustain profitability going forward, while needed growth in emergency, surgical and other ambulatory services should help support it over the longer term once key capital projects are complete by fiscal 2018.
RATING SENSITIVITIES
Steady Profitability: Given somewhat light profitability and the expectation of increased capital outlays over the near term, Redlands Community hospital's rating is contingent upon steady operating cash flow at sufficient levels to support debt service and preserve liquidity.
CREDIT PROFILE
The Redlands Community Hospital (RCH) organization includes a 229-licensed bed acute care hospital, the Redlands Health Foundation, the Redlands Community Hospital Foundation, affiliate entities including an ambulatory surgical center, and other limited liability entities. The hospital operates in Redland, CA approximately 60 miles east of Los Angeles.
Fitch uses consolidated financial data in its analysis. Together, the hospital and the Foundation make up the obligated group (OG), which represented 98.9% of total revenue and 90.6% of the total assets of the consolidated entity in fiscal 2015 (year-end Sept. 30). Total reported revenues were $322.2 million in fiscal 2015.
Operating Stability Expected
RCH currently benefits from its leading market share within its primary service area, a loyal base of affiliated physicians, and limited exposure to government payors. Fitch notes that RCH is a net beneficiary of the state provider fee program, receiving approximately $4 million in net revenue in fiscal 2015. While competition for acute care services is meaningful within the broader service area, the highly regulated environment in the state coupled with steady physician alignment should help RCH preserve its market position going forward.
Manageable Capital Plans
Bond proceeds will be used in part to fund approximately $54 million in key capital projects; namely an expansion of the emergency department and an expansion in surgical services. These projects will address capacity challenges in the emergency department and support incremental growth in surgical and support space. Otherwise, capital outlays are expected to be manageable, including an update to RCH's electronic health record and other routine expenditures.
Debt Profile
With the series 2016 issuance, these will be the only bonds outstanding and RCH will have 100% fixed rate, committed debt. RCH will refinance its existing privately placed series 2013 debt, which is variable rate (swapped to fixed). Maximum annual debt service is measured at $5.7 million and overall debt service is level throughmaturity in 2047.
RCH is party to a swap, which will be terminated using an estimated $2 million in bond proceeds. At July 31, 2016 the fair value of the swap was $1.983 million.
RCH has no pension exposure, as its plan was fully terminated and closed as of fiscal 2014.
Disclosure
RCH will covenant to provide annual disclosure within 120 days of fiscal year end and quarterly disclosure within 45 days of the close of for the first three fiscal quarters to the Municipal Security 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/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=1013808
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013808
Endorsement Policy
https://www.fitchratings.com/regulatory
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