CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on approximately $320 million of Hospital Authority of Hall County and the City of Gainesville (GA) series 2010A revenue bonds issued on behalf of Northeast Georgia Health System (NGHS).
The Rating Outlook is Stable.
SECURITY
Bond payments are secured by a pledge of the gross revenues of the obligated group, a leasehold mortgage on the medical center and a debt service reserve fund.
KEY RATING DRIVERS:
CONSISTENTLY STRONG OPERATING CASH FLOW: Operating EBITDA margin averaged 18.6% since fiscal 2008 and equaled 17.1% in fiscal 2013 easily exceeding Fitch's 'A' category median of 10.7%.
LARGE CAPITAL PLAN: NGHS issued $200 million of series 2012A direct placement 'draw down' bonds to fund construction of a new 100-bed hospital currently under construction in Braselton, GA. The hospital is expected to meet the growth in the service area and is the first new hospital approved in the state in over 20 years.
HIGH DEBT BURDEN: Excluding the impact of the series 2012A bonds, NGHS' debt burden is very high with MADS equal to 6.1% of operating revenue in fiscal 2013 compared to Fitch's 'A' category median of 3.1%. Despite the strong profitability, MADS coverage by EBITDA of 4.0x in fiscal 2013 is only adequate for the rating category. The series 2012A bonds are expected to be refinanced on a long term basis before the maturity date in 2016 at which time the new hospital will be completed and generating revenues to help mitigate the increased debt burden.
SOLID FINANCIAL CUSHION: Unrestricted liquidity increased 44.6% since fiscal 2011 to $610.1 million at Sept. 30, 2013, reflecting strong cash flow and controlled capital spending, equating to a strong 375.4 days cash on hand and a solid 14.8x cushion ratio. However, cash to debt is somewhat light at 97.2%
RATING SENSITIVITIES
MAINTAIN COVERAGE METRICS: NGHS will need to maintain its strong cash flow generation to preserve coverage metrics that are consistent with the 'A' category rating, particularly as NGHS draws down its series 2012A bonds to the full $200 million. Fitch expects that NGHS will refinance the series 2012A bonds with long term bonds in 2016 or before depending upon market conditions. Deterioration of coverage metrics to levels inconsistent with the 'A' category could lead to negative rating movement.
CREDIT SUMMARY:
NGHS is located in Gainesville, GA, approximately 53 miles northeast of Atlanta, and includes two campuses with a total of 557 licensed beds, two skilled nursing facilities, and a physician network operating in the nine surrounding counties. Total operating revenues for fiscal 2013 equaled $678.4 million. NGHS covenants to provide annual and quarterly disclosure. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.
Fiscal 2013 results are based upon unaudited interim financial statements. Audited financial statements were not available at the time of publication.
CONSISTENTLY STRONG OPERATING CASH FLOW
Operating profitability has been extremely strong for the rating category with operating and operating EBITDA margins averaging 6% and 18.1% between fiscal 2010 and fiscal 2013 (Sept. 30 year end). Operating and operating EBITDA margins equaled 5.6% and 17.1% in fiscal 2013, easily exceeding Fitch's 'A' category medians of 3.3% and 10.7%. The strong operating profitability reflects effective cost management practices, stable volumes and NGHS' leading market share in its service area.
LARGE CAPITAL PLAN
NGHS began construction in 2012 on a new 100-bed hospital located in Braselton, GA, approximately 20 miles south of the main campus. The Braselton hospital is expected to be completed and to begin operations in May 2015 and will be located in one of the fastest growing areas in Georgia with favorable demographic characteristics. Indicative of the need for the new facility, the Braselton hospital is the first new hospital to receive CON approval in Georgia in over 20 years.
The total cost of the project is estimated at $200 million and will be financed by the system's series 2012A bonds with a par amount not to exceed $200 million. The bonds are directly placed with Bank of America and feature a 'draw down' format under which NGHS will draw funds as needed to construct the new hospital. At Sept. 30, 2013, $27.7 million had been drawn. The full $200 million is expected to be drawn incrementally through fiscal 2015. The bonds mature in December 2016. NGHS expects to refinance the bonds with long term bonds at or before the maturity date depending upon market conditions.
While concerned about the additional associated debt burden, Fitch views the strategic benefits of the new hospital project favorably. Construction risk is mitigated by a guaranteed maximum price contract, but execution risk exists with any new facility project. Given the high debt burden, NGHS must meet projected operating targets to maintain the current rating and has limited flexibility for adverse events associated with stabilization of the new facility.
Reflecting the Braselton project, capital spending increased to $111.1 million (163% of depreciation expense) in fiscal 2013 and is expected to remain at elevated levels through fiscal 2015, averaging $124 million per year. Capital spending is projected to decrease after the completion of the Braselton hospital to $60 million in fiscal 2016 and is expected to remain at lower levels through 2022.
HIGH DEBT BURDEN
Fitch's primary credit concern remains NGHS' high debt burden. Excluding the series 2012 indebtedness, MADS equaled a high 6.1% of operating revenue in fiscal 2013. The high debt burden requires strong cash flow to maintain adequate coverage. Despite NGHS' strong operations, MADS coverage by operating EBITDA of 2.8x is light relative to Fitch's 'A' category median of 3.4x while MADS coverage by EBITDA is adequate at 4.0x relative to Fitch's 'A' category median of 3.8x. However, MADS does not occur until 2016 and coverage of actual debt service by EBITDA was a solid 5.0x in 2013.
Fitch is concerned that the increased debt load associated with the refinancing of the series 2012A bonds could materially impact coverage metrics in fiscal 2016 if the improvement in cash flow associated with the new hospital does not materialize. Given the already high debt burden, NGHS likely has limited debt capacity at the current rating in the near to mid-term after absorbing the $200 million series 2012A bonds.
Both the series 2012A bonds and the series 2010B bonds ($250 million, rated 'AA-' by Fitch) have additional security provided by Hall County's legal commitment to pay debt service if hospital revenues are insufficient. Pursuant to an intergovernmental agreement, the county is required to levy up to 7 mills to pay debt service on the certificates if gross revenues of the hospital system are insufficient. Fitch views the additional security provided by the county's commitment as a significant credit strength.
SOLID FINANCIAL CUSHION
Unrestricted cash and investments increased 44.6% since fiscal year end 2011 to $610.2 million at Sept. 30, 2013. The increase reflects strong cash flow generation and moderate capital spending between fiscal years 2010 and 2012. Liquidity metrics are strong relative to operating expenses with 375.4 days cash on hand relative to Fitch's 'A' category median of 196.3. However, liquidity is light relative to NGHS's heavy debt burden with 14.9x cushion ratio and 97.2% cash to debt relative to Fitch's 'A' category medians of 15.6x and 129.2%.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', May 20, 2013.
Applicable Criteria and Related Research:
Not-for-Profit Hospitals and Health Systems Rating Criteria Outside the United States
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688554
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=811082
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