CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating on the following bonds issued by the Grand Traverse County (MI) Hospital Finance Authority on behalf of Munson Healthcare (Munson):
--$60,156,000 fixed rate revenue bonds, series 2014A/B/C;
--$24,825,000 variable rate revenue refunding bonds series 2011B*;
--$73,485,000 revenue refunding bonds series 2011A.
*Underlying rating. The series 2011B variable rate demand bonds (VRDB) are supported by a letter of credit (LOC) from JPMorgan Chase.
The Rating Outlook is stable.
SECURITY
Debt payments are secured by a pledge of the accounts and general intangibles of the obligated group. The obligated group includes Munson Healthcare, Munson Medical Center (MMC), Paul Oliver Memorial Hospital, Munson Healthcare Grayling, Munson Healthcare Cadillac, Munson Healthcare Charlevoix, Munson Home Health, Munson Home Care, Munson Home Services, North Flight, Inc., and Munson Healthcare Regional Foundation. The obligated group accounted for 98% of total assets and 97% of system operating revenue in fiscal 2016.
KEY RATING DRIVERS
DISTINCTLY LEADING MARKET POSITION: Munson maintains a distinctly leading market position over a broad service area, with very limited direct acute care competition.
GOOD LIQUIDITY: Munson's liquidity metrics are strong, including cash-to-debt of over 260% at fiscal year-end 2016.
TRACK-RECORD OF OPERATING PROFITABILITY: Munson has a track-record of profitability (4.3% operating margin in fiscal 2016), although its operating EBITDA margin (9.5% in fiscal 2016) lags the category median.
LIGHT DEBT BURDEN: Munson's debt burden is light with maximum annual debt service (MADS) equal to 1.3% of fiscal 2016 revenue. Based on the system's adequate cash flow generation, debt ratios are in-line with category medians.
DEFINED BENEFIT PENSION PLAN: Munson has a defined benefit pension plan that was frozen to new entrants in 2005. The plan had a 67% funded ratio at fiscal year-end 2016 (approximately $148 million underfunded).
RATING SENSITIVITIES
MAINTAIN PERFORMANCE: Fitch expects Munson Healthcare to maintain adequate operating margins to continue to generate good debt service coverage. Maintenance of strong liquidity is expected. Also, Fitch does not anticipate any material threat to Munson Healthcare's very strong market position.
CREDIT PROFILE
Headquartered in Traverse City, MI, Munson consists of MMC, a major tertiary referral hospital with 391 beds, seven owned or affiliated hospitals, outpatient facilities, and home based medical services. Total operating revenue measured over $840 million in fiscal 2016.
During calendar year 2015, Munson acquired three hospitals that it previously had managed: Munson Healthcare Cadillac Hospital and Munson Healthcare Grayling Hospital (from 'AA' rated Trinity Health Credit Group) in February 2015; and Charlevoix Area Hospital in December 2015. While the acquisitions are somewhat dilutive to Munson's operating margins, and contributed to softer results in fiscal 2016, management has identified operating improvements at the newly acquired affiliates to drive system-wide margin improvement.
DISTINCTLY LEADING MARKET POSITION
Munson maintains a distinctly leading market position over a broad service area, which is a key credit positive for the system. Munson's primary service area (PSA) covers five counties, centered around Grand Traverse County. Munson maintains a PSA inpatient market share of approximately 75%. Of Grand Traverse County, the economic hub of the northern portion of the lower peninsula of Michigan, Munson maintains 90%-plus market share.
Demographic characteristics in Grand Traverse County are favorable. Based on U.S. Census Bureau of U.S. Bureau of Labor Statistics data, the population growth rate in the county is greater than the national average and well ahead of state average, the median household income is above state average and just below national average, the poverty rate is well below average, and the unemployment rate is well below average.
GOOD LIQUIDITY
Munson's liquidity metrics are good. At fiscal year-end 2016 (June 30 year-end), cash-to-debt of 266% and the cushion ratio of 46% were well in excess of the 'AA' medians of 198% and 30%, respectively. Cash on hand measured an adequate 237 days ('AA' median is 277 days).
Munson maintains a comparatively conservative investment allocation, particularly considering its modest debt load. Cash and investments are allocated essentially entirely to cash, fixed income, and equities, with only a small allocation to international equities. The portfolio is very liquid, with no exposure to hedge funds or private equity.
TRACK-RECORD OF OPERATING PROFITABILITY
Favorably, Munson has a track-record of profitability (4.3% operating margin in fiscal 2016), although its operating EBITDA margin (9.5% in fiscal 2016) lags the category median (11.7%). (Fiscal 2016 operating margins do not include a $20 million one-time gain due to the termination of the retiree health benefit plan).
Margins moderated in fiscal 2016, after the system recorded an adjusted 5.8% operating margin and 11.4% operating EBITDA margin in fiscal 2015 (adjusted to remove $4 million rural floor settlement funding). The primary drivers for the softer margins in fiscal 2016 include: (a) adding Cadillac and Grayling were dilutive to the system's results; and (b) Munson experienced some nursing shortages, particularly among OR staff, which lead to an increased use of agency nurses and a greater than inflationary wage increase.
Also as a result of the Cadillac and Grayling acquisitions, Munson received an increase in provider tax net funding, from $4.9 million in fiscal 2014 to $8.7 million in fiscal 2015 to $16.8 million in fiscal 2016. Munson receives approximately $25 million of Medicare sole community provider funding. While the cash flow received from these supplemental funding sources is a positive to Munson, any material cuts to these programs would require Munson to make commensurate expense reductions.
Looking forward, Munson is budgeting margins for fiscal 2017 in-line with fiscal 2016, with a budgeted 4.4% operating margin and 9.7% operating EBITDA margin. Management is planning to generate improvements at its recently acquired hospitals.
LIGHT DEBT BURDEN
Another credit positive for Munson is its comparatively modest debt burden. MADS as a measured 1.3% of fiscal 2016 revenue ('AA' median is 2.2%). Consequently, based on the system's adequate cash flow generation, debt ratios are in-line with category medians. In fiscal 2016, MADS coverage from EBITDA measured 5.7x ('AA' median is 6.0x) and debt-to-capitalization 26% ('AA' median is 28%).
At fiscal year-end 2016, Munson's debt portfolio was 87% fixed rate and 13% variable rate. The variable rate debt consists of the series 2011B VRDBs, which are supported by an LOC from JPMorgan Chase (which expires in August 2019).
Financial covenants in Munson's bond documents include: minimum debt service coverage of 1.35x; if the debt service coverage ratio is less than 2.25x and there is no funded debt service reserve fund, then Munson must maintain a cushion ratio of at least 2.0x; minimum cash on hand of 75 days (consultant call-in) and 45 days (event of default); and an additional indebtedness test with a minimum debt service coverage ratio of 1.20x.
Munson's favorable debt ratios are diluted somewhat by the system's defined benefit pension plan. The plan was frozen to new entrants in 2005. The plan was approximately $148 million underfunded at fiscal year-end 2016, translating to a 67% funded ratio.
Munson's capital spending plans are manageable in the coming years. Between fiscal 2017 and fiscal 2021, the system has approximately $285 million of capital plans. Most recently, Munson opened its new cancer center on the MMC campus (in a clinical relationship with UM Health). Moving forward, capital spending will focus on information technology, ambulatory development, and replacing and expanding the NICU and ORs at MMC. In 2018 or 2019, Munson is considering adding approximately $30 million of new money debt.
DISCLOSURE
Munson covenants to provide annual and quarterly disclosure which it posts to the Municipal Securities 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=1014366
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014366
Endorsement Policy
https://www.fitchratings.com/regulatory
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