NEW YORK--(BUSINESS WIRE)--Fitch Ratings has removed from Rating Watch Negative and downgraded the following Oklahoma Development Finance Authority bonds issued on behalf of Great Plains Regional Medical Center (GPRMC):
--$33.7 million hospital revenue bonds, series 2007 to 'BB-' from 'BB.'
The Rating Outlook on the bonds is Negative.
SECURITY
The bonds are secured by a pledge of revenues of the obligated group and a debt service reserve fund.
KEY RATING DRIVERS
EXPECTED COVERAGE VIOLATION: The downgrade reflects GPRMC's weak financial performance in fiscal 2016 and the expectation that it will result in a violation of GPRMC's debt service coverage (DSC) covenant. Based on fiscal 2016 unaudited financial statements, GPRMC posted a $4.98 million net loss on total revenues of $43.1 million (a negative 11.3% excess margin) which translates into a 0.3x maximum annual debt service (MADS) coverage by EBITDA and is below the MTI covenant of 1.1x. The DSC violation also introduces a new level of uncertainty as GPRMC has not received a waiver from bondholders for non-compliance.
SUSTAINED OPERATING CHALLENGES: The Negative Outlook reflects ongoing challenges GPRMC faces over the next year to improve its operating performance as a result of weak service area demographics, reimbursement pressures, and instability in its physician staff.
SUFFICIENT LIQUIDITY: GPMRC's adequate liquidity position provides support for the 'BB-' rating despite the significant operating challenges. As of unaudited fiscal 2016 financials, GPRMC had 168.3 days cash on hand (DCOH), 7.1x cushion ratio, and 61% cash to debt which all compare favorably to Fitch's below investment grade (BIG) medians.
SMALL REVENUE BASE: Fitch believes GPMRC's small revenue base remains a key credit concern as the hospital has limited flexibility to handle adverse events.
OIL DEPENDENT PRIMARY SERVICE AREA: GPRMC's primary service area (PSA) is highly dependent on the cyclical oil and gas industry. Recent pressures on the oil and gas industry have reduced drilling activity in the area and have resulted in a decline in the area population and increases in unemployment levels.
RATING SENSITIVITIES
ONGOING LOSSES: Continued weak operating results in 2017 at or below the level experienced in fiscal 2016 could lead to further downward rating pressure.
MANAGEMENT ACTIONS COULD LEAD TO STABILIZATION: Management has taken multiple actions in the second half of the fiscal year to help reverse the weak financial performance. If these strategies are successful, GPRMC may return to historical operating EBITDA margins of approximately 8.5%. A sustainable recovery at these levels may lead to stabilization of the rating.
CREDIT PROFILE
GPMRC is a 62-licensed bed community hospital located in Elk City, Oklahoma, approximately 120 miles west of Oklahoma City. Total revenues were $41.5 million in fiscal year (FY) 2016.
EXPECTED DEBT SERVICE COVERAGE VIOLATION
The downgrade to 'BB-' reflects GPRMC's weak fiscal 2016 financial performance which is expected to lead to a violation of its debt service coverage covenant. Based on 12 month unaudited financial statements, GPRMC finished the year with a $4.98 million net loss. Unaudited results demonstrate a negative 13.3% operating margin, 0.5% operating EBITDA margin, and negative 11.4% excess margin, which are all below Fitch's BIG medians.
The weak operations translated into a 0.3x MADS coverage by EBITDA which results in non-compliance with the hospital's DSC covenant of 1.1x. Additionally, since coverage is below 1.0x it could trigger an event of default under its Master Trust Indenture. Management reports that the hospital has had initial discussions with bondholders, but a waiver has not been requested or received at this time. Fitch will monitor the situation over the coming year.
DECREASED VOLUMES WEAKENED PERFORMANCE
GPRMC's weak fiscal 2016 results can be attributed to suppressed utilization volumes caused, in part, by weakened demographics in its primary service area and instability in its physician staff. Inpatient admissions of 1,845 represent a 3.3% decline from prior fiscal year levels. Similarly, births and outpatient surgeries have both declined 7% from prior year levels. Conversely, emergency room visits have increased by 3.6% from prior year's levels. While GRPRMC has improved its physician staffing levels over the second half of fiscal 2016, weak service area demographics may continue to suppress utilization volumes.
GPRMC's small revenue base makes it more vulnerable to medical staff and volume volatility, as evidenced by current and historical performance. Management's ability to maintain a stable physician and nursing staff, as well as maintain robust volume levels, will remain key to the rating. Despite depressed volume levels and weak fiscal 2016 results, GPRMC's management team has made some changes in the second half of fiscal 2016 which helped improve operations.
Management has replaced the entire hospitalist team, reopened inpatient swing beds, and captured some volumes from the recently closed Sayre Memorial Hospital. Despite improvements in the second half of 2016, management will continue to face challenges related to its physician staff, weak service area, and reimbursement pressures. The Negative Outlook reflects these challenges and an inability to improve operations in fiscal 2017 could lead to further downward rating pressure.
ADEQUATE BALANCE SHEET
GPMRC's balance sheet remains adequate for its current rating level and helps provide some financial cushion against its weak operating performance. Based on the unaudited 12 month financial statements, GPRMC's unrestricted cash and investments declined to $20.6 million which translates into 168 DCOH, 7.1x cushion ratio, and 61% cash to debt which all compare favorably to Fitch's BIG medians of 95.7, 6.4x, and 50.8%, respectively. GPMRC's cash position remains a key credit consideration. However, inability to stem operating losses could cause liquidity deterioration resulting in further rating pressure.
CONSERVATIVE DEBT PROFILE
GPRMC has a 100% fixed rate debt profile and no derivative exposure which is viewed positively. No additional debt is planned and capital needs are expected to remain modest.
DISCLOSURE
GPMRC covenants to disclosure annual and quarterly disclosure which it posts regularly to the Municipal Securities Rulemaking Board's EMMA System. Disclosure has been timely and thorough, with good access to management.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015)
https://www.fitchratings.com/site/re/868824
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013987
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013987
Endorsement Policy
https://www.fitchratings.com/regulatory
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