NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on the following bonds issued by the Monroe County Hospital Authority on behalf of Pocono Health System (PHS):
--$31.8 million series 2012A hospital revenue bonds.
--$61.6 million series 2007 revenue bonds.
The Rating Outlook is Stable
SECURITY
Bond payments are secured by a pledge of gross revenues of the obligated group and by a first-lien mortgage on Pocono Medical Center.
KEY RATING DRIVERS
ROBUST LIQUIDITY METRICS: Liquidity metrics remain strong with 255.5 days cash on hand and 18.9x cushion ratio exceeding Fitch's 'A' respective category medians of 196.3 days and 15.6x. Projected capital spending in fiscal 2014 may pressure liquidity metrics depending on cash flow.
COMPRESSED PROFITABILITY: Operating profitability was pressured in fiscal 2013 (June 30 year-end) with operating EBITDA margin decreasing to 9.5% from 11.4% in fiscal 2012. Management implemented cost reduction initiatives in fiscals 2013 and 2014 and expects operating EBITDA margin to improve to 11.1% in fiscal 2014. However, through the six months ended Dec. 31, 2013, operating EBITDA margin remained at 9.7%.
MODERATE DEBT BURDEN: PHS' debt burden remains moderate with maximum annual debt service (MADS) equal to 3.4% of revenues in fiscal 2013. However, due to the decline in profitability, MADS coverage by EBITDA dropped to 2.9x in fiscal 2013 and is now light relative to Fitch's 'A' category median of 3.8x.
LEADING MARKET SHARE: PHS holds a leading market share of approximately 50% in its primary service area (PSA). The opening of a new cancer center in June 2012 should further strengthen the system's competitive position.
RATING SENSITIVITIES
IMPROVED CASH FLOW: PHS has budgeted for improved cash flow in fiscal 2014, which is necessary to maintain the current rating level. Failure to improve profitability and coverage metrics could result in negative rating pressure.
CREDIT PROFILE
Pocono Health System operates a 235 licensed-bed acute care community hospital located in East Stroudsburg, PA, approximately 85 miles from Philadelphia and 75 miles from New York City. Additional operations include a cancer center, a community health center, and three immediate care centers. Total revenues equaled $263.3 million in fiscal 2013.
ROBUST LIQUIDITY METRICS
Despite elevated levels of capital spending in fiscal years 2012 and 2013 PHS has maintained robust liquidity metrics. Unrestricted cash and investments equaled $168.9 million at Dec. 31, 2013. With 255.5 days cash on hand, 18.9x cushion ratio and 131% cash-to-debt, liquidity metrics exceed Fitch's 'A' category medians of 196.3 days, 15.6x and 129.2%. Capital spending is projected to remain high in fiscal 2014 at $31.9 million (1.9x depreciation expense) and is expected to be funded through a combination of cash flows and unrestricted cash. However, liquidity metrics are expected to remain consistent with the rating category.
COMPRESSED PROFITABILITY
Operating profitability compressed in fiscal 2013 with operating EBITDA margin decreasing to 9.5% from 11.4% in fiscal 2012. The compression was primarily due to sequestration cuts and declining volumes. Inpatient admissions decreased 1.4% while total surgeries decreased 4.3% year over year. Management implemented cost reduction strategies including labor productivity initiatives and the transfer of employees to a defined contribution pension plan from a defined benefit plan. Operating EBITDA margin remained relatively the same at 9.7% in the six-month interim period ending Dec. 31, 2013 (the interim period). Management is currently projecting operating EBITDA margin to rebound to 11.1% at fiscal year-end 2014, which Fitch believes is achievable.
MODERATE DEBT BURDEN
Leverage and debt burden metrics remain moderate with 42.1% debt-to-capitalization at Dec. 31, 2013 and with MADS equal to 3.4% of revenue in fiscal 2013 relative to Fitch's 'A' category medians of 40.7% and 3.1%, respectively. While historically adequate, MADS coverage by EBITDA fell in fiscal 2013 to 2.9x due to the weakening in profitability. However, coverage rebounded slightly in the interim period to 3.3x, and is expected to improve to 3.8x in fiscal 2014, equal to Fitch's 'A' category median.
LEADING MARKET SHARE
PHS has sole community provider status in its region and holds a leading market share of approximately 50% in its primary service area. The system's competitive position was further strengthened by the opening of its new cancer center in June 2012. The cancer center opened on time and on budget. Operating performance has met expectations to date.
CONTINUING DISCLOSURE
PHS covenants to provide annual and quarterly disclosure. Disclosure is provided on the Municipal Securities Rulemaking Board's EMMA System.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=821479
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