NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the following hospital revenue refunding and improvement bonds issued through Hospital Authority No. 1 of Scotts Bluff County, Nebraska on behalf of Regional West Health Services (RWHS):
--$63.2 million series 2016A.
The series 2016A bond proceeds are expected to be used to refinance RWHS' outstanding 2012 A & B bonds, finance approximately $25 million in capital improvements, and pay costs of issuance. The bonds are expected to sell via negotiation the week of Nov. 14, 2016.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of gross revenues and a mortgage lien from the obligated group.
KEY RATING DRIVERS
DOMINANT MARKET POSITION: The 'BBB+' rating reflects RWHS' dominant market position and limited competition which has resulted in 88% market share in its primary service area in fiscal 2015 (Dec. 31 year end). Although the service area has weak demographic trends, RWHS acts as a regional referral center in western Nebraska and is the largest provider within 150 miles.
MANAGEABLE DEBT BURDEN: The series 2016 financing provides meaningful cash flow relief as MADS declines despite the issuance of additional debt. RWHS' pro forma MADS equates to a manageable 2.3% of fiscal 2015 total revenues which compares favorably to Fitch's 'BBB' category median of 2.6%. Furthermore, debt to EBITDA was a low 2.3x in fiscal 2015 which is better than the category median of 4.3x.
SUFFICIENT LIQUIDITY: Although RWHS has demonstrated mixed liquidity ratios when compared to Fitch's medians, its cash position remains adequate for its rating level. In fiscal 2015, RWHS had 125.5 days cash on hand which remains below the median of 161.2. However, RWHS' cushion ratio of 14.5x and cash to debt position of 147.3% both remain higher than the category medians of 11.7x and 90.8%, respectively.
STRONG COVERAGE: RWHS' low debt burden and improving operational performance has translated into pro forma MADS coverage of 4.4x in fiscal 2015, which is higher than Fitch's 'BBB' category rating of 3.0x.
WEAK PROFITABILITY: RWHS' profitability is light with 0.7% operating margin and 5.7% operating EBITDA margin in fiscal 2015. These metrics have improved since fiscal 2012 but still compare unfavorably to category medians of 1.5% and 8.7%, respectively. RWHS' dominant market position, light debt burden, and liquidity position help mitigate concerns over its weaker profitability.
RATING SENSITIVITIES
MAINTENANCE OF CURRENT PROFILE: The 'BBB+' rating assumes Regional West Health Services will continue to maintain sufficient operational performance to sustain solid debt service coverage in addition to maintaining its liquidity strength, and market position. Deterioration in liquidity metrics or debt service coverage could put pressure on the rating.
CREDIT PROFILE
Regional West Health Services is a non-profit corporation which is organized as a parent company for affiliated non-profit healthcare organizations. The Obligated Group consists solely of Regional West Medical Center (RWMC) which is an acute care general hospital in Scottsbluff, Nebraska. RWMC is licensed to operate 166 acute care beds and is a regional referral center. Other affiliated entities of RWHS which are not part of the Obligated Group are: Regional West Physicians Clinic, Regional West Foundation, Regional West Village, Regional West Garden County, and Regional Care. As of fiscal 2015, the Obligated Group accounted for approximately 77% of total revenues and 75% of total assets. Fitch's analysis is based on the consolidated entity. Total revenue in fiscal 2015 was $255 million.
DOMINANT MARKET POSITION
A key driver of the 'BBB+' rating is RWHS' dominant market position in its primary service area. RWMC is located in Scottsbluff, the largest city in the Nebraska panhandle. RWMC's primary service area encompasses Scotts Bluff County, Morrill County, Banner County, Sioux County, and Box Butte County and its secondary service area includes Dawes, Cheyenne and Kimball Counties in Nebraska and Goshen County in Wyoming. Approximately 65% of RWMC's admissions originate from its PSA while 21% is from its SSA.
In fiscal 2015, RWHS had an 88% market share in its PSA, which is an increase from fiscal 2012 when it was 85%. RWHS is viewed as an essential service provider in its primary service area and remains one of three level II trauma centers in the state of Nebraska. RHWS has limited competition as only one other hospital operates in its PSA. Additionally, no hospital has more than 25 licensed beds in RWHS' primary, secondary, or tertiary service areas and the nearest hospital with similar services is over 150 miles away. RWHS' dominant market position and limited competition should continue to support demand for its services.
WEAK PROFITABILITY
Through the seven months ended July 31, 2016, profitability has declined to a negative 1.2% operating margin and 3.8% operating EBITDA margin. Excess margin was 2.9% due to solid non-operating income primarily due to a 12% equity interest in the 166 bed Medical Center of Rockies (MCR) located in Loveland, CO. MCR is part of University of Colorado Health (revenue bonds rated 'AA-' by Fitch). Based on its ownership interest in MCR, RWHS receives semi-annual distributions of 'net distributable cash flow', which totaled approximately $12 million combined for 2015 and 2014. RWHS accounts for its ownership in MCR using the equity method and reports all changes in income as non-operating revenues for a combined total of $16.3 million in 2015 and 2014.
STRONG COVERAGE
As a result of the steady income from the MCR investment, historical coverage of pro forma MADS by EBITDA has been solid and compares favorably to 'BBB' category medians. In fiscal 2015 and 2014, RWHS generated pro forma coverage of MADS by EBITDA of 4.4x and 3.2x exceeding the 'BBB' median of 3.0x. RWHS' dominant market position, adequate EBITDA generation, and low debt burden should continue to support strong coverage ratios moving forward. Additionally, while consolidated statements illustrate weaker operating metrics for RWHS when compared to the medians, RWMC, which is the sole member of the obligated group, has demonstrated solid operational performance. As of fiscal 2015, RWMC had an operating margin of 12.1% and an operating EBITDA margin of 18.7%.
SUFFICIENT LIQUIDITY
RWHS' unrestricted cash and investment position increased to approximately $83 million in fiscal 2015 from $63 million in fiscal 2012. This strong liquidity growth can be attributed to its strong market position, its solid core operations, and its joint venture in the MCR. At July 31, 2016, RWHS had 85.4 million of unrestricted cash and investments.
Despite these sizeable increases in liquidity over the last few fiscal years, RWHS has demonstrated mixed results when compared to the Fitch medians. As of fiscal 2015, RWHS had 125.5 days cash on hand, 14.5x cushion ratio, and 147.3% cash to debt. While cushion ratio and cash to debt compare favorably to the category medians of 11.7x and 90.8%, respectively, days cash on hand remains slightly lower than the median 161.2. The inclusion of new debt for the 2016 series issuance is expected to decrease cash to debt to approximately 112%, which still remains well above the category median.
MANAGEABLE DEBT PROFILE
Total outstanding debt after the series 2016 financing totals $75 million and includes $64 million series 2016 bonds and an $11 million bank placement (matures in 2026). The series 2016 bond proceeds are expected to be used to refinance existing RWHS debt, to fund capital expenditures, and to pay costs of issuance. Approximately $25 million of the series 2016 funds will be used to fund capital expenditures. Despite the additional $25 million in debt, MADS is expected to decline 18% to $5.75 million due to the significant debt service savings from the refinancing and the extension of final maturities of the new series 2016 bonds.
Pro forma MADS equates to a manageable 2.3% of fiscal 2015 revenues which compares favorably to Fitch's 'BBB' category median of 3.6%. Additionally, debt to capitalization is low at 30.7% which compares favorably to the category median of 50.2%. In conjunction with the issuance of the series 2016 bonds, RWHS expects to use cash to terminate its only outstanding interest rate swap. Following the termination of the swap and refunding of the outstanding debt, RWHS will have 100% fixed-rate debt and no outstanding derivative instruments which is viewed positively. Covenants under the bank placement are the same as MTI covenants.
DISCLOSURE
RWHS covenants to provide audited financial statements and operating data within 150 days of its fiscal year end and certain unaudited financial information within 60 days of each fiscal quarter. All reports will be disclosed via the Municipal Securities Rulemaking Board's Electronic Municipal Market Access 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
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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014349
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014349
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https://www.fitchratings.com/regulatory
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