NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the rating on approximately $42.7 million of New Jersey Health Care Facilities Financing Authority revenue bonds, series 2014A, issued on behalf of Hunterdon Medical Center, NJ (HMC) to 'A+' from 'A'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of the gross receipts of the obligated group, of which HMC is the sole member.
KEY RATING DRIVERS
IMPROVED PROFITABILITY: The upgrade to 'A+' from 'A' is driven by Hunterdon Healthcare System Inc.'s (HHS) improved profitability in fiscal years 2014 and 2015 (Dec. 31 year end) following weaker 2013 results. Operating and operating EBITDA margins increased to 3.8% and 9.7% in fiscal 2015, respectively, in line with 'A' category medians, and have improved further to 6.6% and 12.6% through the six months ended June 30, 2016. Increasing profitability reflects growth in outpatient volumes and good expense management.
LOW DEBT BURDEN: Hunterdon's low debt burden remains a credit positive. Coverage of maximum annual debt service (MADS) equaled 6.5x in fiscal 2015, and MADS constitutes a very light 1.5% of revenues, both favorable to the 'A' rating category medians. Including swaps, HHS's debt portfolio is 87% fixed-rate with generally level debt service; the system's capital needs are manageable.
DOMINANT MARKET SHARE: Hunterdon had a dominant market share of 64.6% in 2014 (latest available) as the sole acute care provider in Hunterdon County, which has a generally favorable demographic profile. HMC has added urgent care facilities and has a strong referral network in its primary market, and has been successfully expanding outpatient services into adjacent Somerset County with planned future services in partnership with the affiliated Atlantic Health System (Atlantic).
SOLID LIQUIDITY RELATIVE TO DEBT: Liquidity metrics relative to debt compare favorably to the 'A' category medians due to the low debt burden. Cash-to-debt of 198.6% and cushion ratio of 30.7x as of June 30, 2016 are better than the respective 'A' rating category medians of 19.4x and 148.6%. However, days cash on hand (DCOH) of 186.7 at June 30, 2016 is lower than Fitch's 'A' rating category median of 215.5 DCOH.
RATING SENSITIVITIES
MAINTAIN OPERATING PERFORMANCE: Fitch expects Hunterdon Healthcare System, Inc. to maintain solid operating profitability and its solid liquidity position relative to debt, which is necessary to remain at the current rating level.
CREDIT PROFILE
HHS includes HMC, a 178-bed hospital located in Flemington, New Jersey; a supporting foundation; a community-focused and senior services organization; and a for-profit entity conducting various proprietary activities. HHS also owns 50% of two joint ventures: one with its affiliate, Atlantic Health System, and the other with an independent practice association in which roughly 82% of HMC's medical staff are members. The system reported revenues of $304 million in fiscal 2015 (Dec. 31 year end). HMC is the only member of the obligated group and constituted 91% of the consolidated system assets and system revenues in 2015. Fitch's analysis is based on the system's consolidated activities.
DOMINANT MARKET SHARE
The hospital is the only provider of acute care services in Hunterdon County, which constitutes its primary service area (PSA). HMC's market share in the PSA was reported at 64.6% in 2014, up slightly from 63.8% in 2012. Hunterdon's PSA has a generally favorable demographic profile and, although population growth is flat, household income and the unemployment rate compare favorably to those of New Jersey and the United States. Hunterdon has added urgent care and other outpatient facilities in its PSA, building out its continuum of care and relieving strain on the hospital's emergency department.
HMC has also captured outpatient volume growth as it expands coverage into Somerset County, which is growing and is currently considered a secondary service area (SSA). HMC has placed primary care, urgent care, and specialists in Somerset County, and management reports increasing market share in the SSA. The expansion effort is anchored by a medical office building in Bridgewater, NJ, housing specialists from HHS and with space for Atlantic sub-specialists. HHS became part of an alliance with Atlantic in 2014, which has enhanced HHS's access to specialties and has helped in physician recruitment in addition to providing potential cost reduction and clinical collaboration opportunities. The two organizations remain independent but the venture has joint management and physician advisory committees to guide their common initiatives.
IMPROVING PROFITABILITY
The system finished fiscal 2015 with an operating gain of $11.7 million, equal to operating and operating EBITDA margins of 3.8% and 9.7%, respectively, compared to weaker operating profitability in fiscals 2014 (2.7% operating margin) and 2013 (0.3%). Financial performance through the interim period has been stronger, driven mainly by outpatient volume growth. In addition, the series 2014-funded cardiovascular wing addition and vertical expansion have moved the hospital to more private rooms. Revenues increased by 4.5% in 2015 from 2014, and are on pace to increase further through the interim period, with a 5.7% increase in revenue from the prior year period. Operating income for the six-month interim period was $10.2 million, equal to an operating margin of 6.6% and operating EBITDA margin of 12.6%, respectively, above the 'A' category medians of 3.8% and 10.3%.
Well-managed salary and benefits expenses remain a notable driver for improved performance. In addition to productivity and process improvement initiatives, HMC froze its defined benefit plan effective Jan. 2014 and materially lowered its pension expense. HHS projects fiscal 2016 results will be similar to those of fiscal 2015, which Fitch considers reasonable.
DEBT PROFILE
Total outstanding debt was $70.6 million as of June 30, 2016 and in addition to the series 2014A bonds, other indebtedness includes bank placements. The debt figure also includes only $2.4 million of a $10.2 million drawdown bank loan, which was acquired in May 2016 to finance leasehold improvements at the new medical office building. Fitch used pro forma MADS of $4.6 million (occurring in fiscal 2017), which includes the full drawdown of the $10.2 million and incorporates the amortization of the bank placements.
LIQUIDITY
Total unrestricted cash and investments were $140 million at June 30, 2016. This figure does not include the approximately $22.4 million of donor-restricted cash and investments available to HMC and raised by the Hunterdon Healthcare Foundation for the sole purpose of supporting HMC. These funds have generally been used for capital or program support.
Build-up of liquidity is a board stated goal; Fitch believes HHS is well positioned to maintain solid cash flow with a strong market position and manageable capital needs further offset by a good fundraising track record.
DISCLOSURE
HHS discloses quarterly and annual audited financial statements only for HMC. Fitch requests consolidated financial information from HHS. Quarterly disclosure includes a balance sheet, income statement, cash flow statement, and utilization statistics.
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/gws/en/disclosure/solicitation?pr_id=1014751
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