NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded its rating on the following Health Care Authority of Cullman County (AL) bonds issued on behalf of Cullman Regional Medical Center (CRMC) to 'BBB-' from 'BB+':
--$59.7 million revenue bonds, series 2009A.
The Rating Outlook is revised to Stable from Positive.
SECURITY
The bonds are secured by a pledge of revenues, mortgage, and a debt service reserve fund.
KEY RATING DRIVERS
IMPROVED OPERATING PROFILE: The upgrade to 'BBB-' is driven by YOY improvement in CRMC's operating profitability, as evidenced by a 9% operating margin in fiscal 2016, up from negative 1% in fiscal 2013, and significantly above Fitch's 'BBB' median of 1.5%. The operating improvement is attributed to effective revenue cycle and cost containment initiatives, good volume growth and a stable economy in the service area.
SOLID LIQUIDITY: The upgrade also reflects CRMC's liquidity position which is now more in line with investment-grade levels. Liquidity has grown by over 70% from FYE 2013 (June 30, 2013) to Sept. 30, 2016, when it equated to 241.8 days cash on hand (DCOH), 11.2x cushion ratio and 106.6% cash-to-debt, all well exceeding the relative 'BBB' medians.
MODERATING LEVERAGE: CRMC's leverage metrics have moderated over the last four years through top-line revenue growth and solid profitability which resulted in cash and unrestricted net assets growth over the time period. Debt-to-EBITDA was a low 2.6x in fiscal 2016, comparing favorably to Fitch's median of 4.3x. Maximum annual debt service (MADS) equated to a high 5.2% of total fiscal 2016 revenues as compared to the 'BBB' median of 3.6%, but is improved from 6.2% in fiscal 2013.
NEAR-TERM CAPITAL PLANS: CRMC is anticipating beginning construction on two significant capital projects in fiscal 2017. The total cost is expected to be approximately $17 million and will be funded either via cash or a draw on an existing line of credit. Fitch believes that the organization can absorb any associated negative impacts to its liquidity or debt burden in light of CRMC's improved level of cash flow over the last three years.
STRONG MARKET POSITION: CRMC's designation as a sole community provider hospital and 56% market share (up from 48% in 2013) in its primary service area (PSA) allow it to benefit from strong volumes, favorable payor contracts, and enhanced Medicare reimbursement.
RATING SENSITIVITIES
OPERATING STABILITY EXPECTED: Fitch expects Cullman Regional Medical Center to maintain operating profitability at levels near recent performance. Continued improvement in liquidity and/or a moderation in its debt burden could allow for positive rating action over the medium term.
CREDIT PROFILE
CRMC is an acute care general hospital with 145 licensed beds (115 operational), located in Cullman, AL, which is 50 miles north of Birmingham. CRMC is designated as a Level III trauma center and is designated as a sole community provider. CRMC had total operating revenues of $111.4 million in fiscal 2016.
IMPROVED OPERATING PROFILE
CRMC recorded $10 million in income from operations in fiscal 2016, much improved from negative $1 million in fiscal 2013, equating to a very strong 9% operating margin. Operations have improved significantly YOY since 2013 due to the successful implementation of revenue-cycle and cost-containment initiatives. CRMC's days in accounts receivable improved from a high of 60.4 in fiscal 2012 to 38 in fiscal 2016. In addition, personnel costs fell to a low of 46% of total revenues in fiscal 2016, favorable to the 54.4% median and down from 51.2% in fiscal 2013. Staffing improvements and vendor contract renegotiations yielded a $7.6 million cost reduction in fiscals 2016 and 2015.
CRMC's positive profitability trend has also been supported by enhanced marketing efforts that target patients, as well as physicians in the secondary market area, and a good local economy. CRMC's operating EBITDA margin of 17.8% in fiscal 2016 was ahead of the 8.7% median and improved further to 18.1% through the three-month interim (ended Sept. 30, 2016).
SOLID LIQUIDITY
CRMC's $64.8 million in unrestricted cash and investments at Sept. 30, 2016 increased by over 70% from $38.1 million at FYE 2013. CRMC's DCOH of 241.8 and cash-to-debt of 106.6% were both significantly above Fitch's 'BBB' category medians of 161.2 days and 90.8%, respectively. Cushion ratio of 11.2x was only slightly below the 11.9x median. Cash growth is expected to be constrained in fiscal 2017 as CRMC engages in several capital projects, but management is projecting cash to remain in excess of debt through the construction period.
MODERATING LEVERAGE
CRMC's revenues have grown by 20% over the last four fiscal years, resulting in MADS as a percent of revenue of 5.2% in fiscal 2016, still unfavorable to the median but improved from 6.2% in fiscal 2013. In addition, debt-to-EBITDA has improved to 2.6x in fiscal 2016, from 5.8x in fiscal 2013, and compared well to the 'BBB' median of 4.3x. Debt-to-capitalization has also improved, to 58%, due to growth in unrestricted net assets that has been driven by stronger cash flow over the last three years. Fitch expects CRMC's leverage metrics to continue to moderate as it continues to grow its cash position and receives incremental revenues upon stabilization of its construction projects.
NEAR-TERM CAPITAL PLANS
CRMC is anticipating beginning construction on two significant capital projects in fiscal 2017. The larger of the two is a 30-bed addition to its inpatient tower, which is expected to cost $14 million. The inpatient expansion is meant to address growing throughput issues associated with stronger YOY inpatient volumes, and should be revenue-accretive over the medium- to longer-term. The smaller project includes the construction of additional outpatient facilities on the current hospital campus.
Both projects are expected to be funded from cash and possibly a draw on an existing line of credit. Fitch views the projects positively as they should be accretive to CRMC over the medium- to longer-term. While the projects may negatively impact CRMC's liquidity or debt burden in the short term, Fitch believes the organization can absorb the negative fluctuations at the higher rating level, especially given the improved level of cash flows over the last three years.
DEBT PROFILE
All of CRMC's outstanding debt is fixed-rate. CRMC has one basis swap outstanding, with no collateral posting requirements.
DISCLOSURE
CRMC covenants to disclose quarterly unaudited (within 60 days) and annual audited (within 120 days) financial statements, including management discussion and analysis, to the Municipal Securities Rulemaking Board's EMMA System.
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=1014448
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014448
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https://www.fitchratings.com/regulatory
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