NEW YORK--(BUSINESS WIRE)--Fitch Ratings, as part of its on-going surveillance efforts, downgrades to 'BBB-' from 'BBB' and maintains on Rating Watch Negative its rating on the following series of bonds issued by the Delaware Health Facilities Authority on behalf of Beebe Medical Center (Beebe):
--Approximately $21 million series 2004A refunding revenue bonds;
--Approximately $21.4 series 2005A fixed-rate revenue bonds.
RATING RATIONALE
--The downgrade to 'BBB-' reflects the lower profitability in fiscal 2010 with the major drivers including the expensing of a reserve against a potential litigation settlement, lower Medicare reimbursement and increased physician losses. The fiscal 2010 operating loss of $4.6 million, equal to a negative operating margin of 1.8%, is a reversal of what historically has been a positive operating trend and compares unfavorably to Fitch's 'BBB' category median of 1.9%.
--Beebe's liquidity deteriorated in 2010 as a result of the use of internal funds to pay off the series 2005B bonds and terminate a related swap and the need to set aside collateral for the Letter of Credit (LOC) providing liquidity for the series 2002 bonds, but it has since stabilized and has been maintained for the first quarter of fiscal 2011.
--Beebe's debt load is manageable with maximum annual debt service (MADS) representing a light 2.4% of revenues in fiscal 2010 after the redemption of the series 2005B bonds and coverage of MADS of 3.9 times (x), which compares favorably to the category medians of 3.5x and 2.5x, respectively.
--The maintenance of the Rating Watch Negative reflects the considerable uncertainty of the resolution of the litigation involving Beebe. The timing, magnitude and mechanism of such resolution or settlement may result in additional negative rating changes of several notches.
KEY RATING DRIVERS
--Ability to continue to meet the 60 and 100 day cash on hand covenants required by Beebe's bond and letter of credit documents (as calculated under the respective documents which may differ from Fitch's methodology). Further deterioration in operating profitability would introduce negative credit pressure.
--A potential large negative judgment against Beebe would have a material effect on the rating.
SECURITY:
The bonds are secured by a pledge of Beebe's gross receipts and a mortgage on its principal facilities.
Credit summary
The downgrade to 'BBB-' reflects the lower profitability Beebe recorded for the fiscal year ended June 30, 2010 and the loss of $1 million budgeted for fiscal 2011. Beebe ended fiscal 2010 with an operating loss of $4.6 million on revenues of $252.6 million, equal to a negative operating margin of 1.8%. While volumes in 2010 were essentially stable, the decrease in operating performance was due to several factors, including a $5.7 million reserve contingency against the potential liability involving Beebe and Dr. Bradley (see prior Fitch press releases listed below), a $6.9 million loss at the Beebe Physician Network (BPN) (a $1.8 million increase over the prior year), and lower Medicare reimbursement (2009 included a $3.5 settlement for prior years and the Medicare wage index was lower in 2010). Adjusting for the litigation reserve, which is a one time expense, operating income in fiscal 2010 would have been a positive $1 million for an operating margin of 0.4%, but nevertheless a reduction from the operating margins which averaged over 3% in the prior years. Management is projecting a similar performance for fiscal 2011. The increase in the BPN loss was driven by recruitment of several new physicians, whose initial contract is based on a fixed salary, though physicians, other than hospitalists, are being transitioned to productivity based compensation over time.
The plaintiffs in the Bradley legal action have filed a motion for certification to consolidate the now approximately 40 individually filed cases into a class action suit with the expectation that the certification may be granted in February 2011. It is impossible at this time to determine the outcome and the impact, if any, on Beebe. As a prudent matter, Beebe in 2010 has expensed a reserve of $5.7 million against potential liability in the case, which is the maximum that could be paid out based on June 30, 2010 available funds without violating the liquidity covenants in Beebe's legal documents. A settlement exceeding the reserved amount would have potentially material impact on Beebe.
During 2010 Beebe's liquidity was initially impacted by the redemption of the series 2005B bonds and the restriction of $19.9 million needed to collateralize the LOC backing the series 2002 bond issue but has since stabilized and has been maintained for three-month interim period ended Sept. 30, 2010 (interim period). Beebe reported cash and unrestricted investment of $52.2 million at 2010 fiscal year end, equal to 82.9 DCOH, 8.5x cushion ratio and 90.6% cash to debt. Including the $19.9 million of collateral securing the LOC (the LOC permits the inclusion of the collateral in the calculation of the 100 DCOH covenant), DCOH would be equal to 114.5 DCOH, cushion ratio of 11.7x and 125.1% cash to debt, which would compare well to the 'BBB' category medians of 122.2, 8.5x and 75.9%. Unrestricted cash for the interim period was reported at $59.2 million, equal to 93.1 DCOH.
Beebe's debt burden is relatively moderate, with MADS coverage by operating EBITDA of 2.4x at the category median in fiscal 2010 (MADS includes the series 2002) and MADS representing a moderate 2.4% of revenues, favorable to the category median of 3.5%. Owing to a favorable investment environment, 2010 coverage by EBITDA was 3.9x, exceeding the 2.5x 'BBB' median. Based on stronger operating results for the first quarter of 2011, which tends to be the most profitable due to the summer tourist season, which produced operating margin of 3.8%, coverage of MADS by operating EBITDA was 5.1x
The maintenance of the Rating Watch Negative reflects the considerable uncertainty of the resolution of the litigation involving Beebe. Fitch will continue to monitor the progress of the legal actions and adjust the rating as warranted. For more information on Beebe Medical Center, see Fitch research dated July 19, 2010, April 14, 2010 and Jan. 27, 2009, available on Fitch's web site at www.fitchratings.com.
Beebe Medical Center is a 195 licensed-bed acute hospital located in Lewes, DE with $252.6 million of operating revenues in fiscal 2010. BMC covenants to disclose annual audited financial statements and management discussion and analysis as well as quarterly financial statements including balance sheet, income statement, and utilization statistics.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated Aug. 16, 2010;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
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