NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB+' rating on $68,405,000 Cuyahoga County (OH) hospital facilities revenue bonds, series 2000 (UHHS/CSAHS - Cuyahoga, Inc. and CSAHS/UHHS - Canton, Inc. Projects).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of the gross revenues of Mercy Medical Center (MMC; formerly known as UHHS/CSAHS Cuyahoga, Inc. and CSAHS/UHHS Canton, Inc.) obligated group, a first lien mortgage of hospital property and a debt service reserve fund.
KEY RATING DRIVERS
STEADY FINANCIAL RECOVERY: Continued improvement in core operations in fiscal 2014 (Dec. 31 year-end) generated positive operating income of $3.6 million (1.2% operating margin)for the first time since posting a $17.3 million loss (negative 7% operating margin) in 2010. Improved results continued through the 2015 interim period and were supported by recovering patient volume and realization of cost control initiatives.
WEAK LIQUIDITY: At March 31, 2015, MMC's $59.4 million in unrestricted cash and investments equated to 75 days cash on hand, 5.3x cushion ratio, and 68.1% cash-to-debt. While approximately 10% improved year-over-year, liquidity indicators remain weak against investment-grade category medians.
IMPROVED DEBT SERVICE COVERAGE: Recovered cash flows produced significantly better maximum annual debt service (MADS) coverage in fiscal 2014 at 2.5x, compared to 1.9x in 2013 and below 0.7x from 2010-2012. Through the six-month interim period, sustained profitability generated 3x MADS coverage. Additionally, the master trust indenture (MTI) calculates MADS coverage only on the 2000 bonds (excludes intercompany debt, leases, and other obligations). Per the MTI, MADS coverage was a solid 3.9x in 2014 and 4.7x in the interim period.
SPONSOR SUPPORT: Sisters of Charity of Health System (SCHS) is the sole corporate member of MMC. Fitch views the close relationship with, and financial strength of, SCHS as a credit strength in support of the rating. However, SCHS does not guarantee and is not obligated to pay debt service on MMC's obligations and the system's liquidity strength is not a key factor in MMC's rating.
RATING SENSITIVITIES
IMPROVED STABILITY EXPECTED: Fitch expects Mercy Medical Center to stabilize its operating and financial performance at levels consistent with 2014 and year-to date 2015 results. Sustained generation of sufficient cash flows to fund capital expenditures and gradual rebuild of its balance sheet in the next 12-24 months would lead to positive rating movement.
CREDIT PROFILE
Mercy Medical Center, located in Canton, Ohio, is a teaching hospital with 393 licensed beds, of which, 329 are staffed. Total operating revenues were $301.1 million in fiscal 2014.
Headquartered in Cleveland, OH, Sisters of Charity Health System is the sole corporate member of MMC and two additional hospitals in Ohio and South Carolina.
Improving Core Operations
MMC's financial and operating results improved and exceeded targets in 2014, posting a gain for the first time since 2009. Operating margin improved to 1.2% in 2014 from negative 0.7% in 2013 and negative 6% in both 2012 and 2011. Similarly, operating EBITDA margin rebounded to 8.9% in 2014 compared to 7.3% the prior year. Financial improvements were sustained through the six-month interim period with operating and operating EBITDA margins of 3.1% and 10.5%, respectively. Fitch notes that the interim period was aided by a $1.7 million net benefit from a Medicare rural floor adjustment. Excluding this, operating and operating EBITDA margins would be 2% and 9.6%, respectively, still a marked improvement from historical results.
Management attributed the recovering profitability to better patient volume and realization of performance improvement initiatives focusing on revenue growth and expense control. In particular, MMC's CORE project with Berkeley Research Group generated nearly $20 million of improvements in addition to supply chain and other savings initiatives. Additionally, Ohio's Medicaid expansion has led to steady to slightly growing utilization and a considerable shift from self-pay to Medicaid, also contributing to the overall improvement. Budgeted net income for fiscal 2014 is $5.4 million, which management expects to exceed.
Support of Sponsor
Sisters of Charity Health System is the sole corporate member of MMC and MMC is included in SCHS's consolidated financial statements. Although SCHS is not legally obligated on MMC's bonds, Fitch views the close relationship to SCHS and the financial strength of SCHS as a credit strength in support of the rating. SCHS has been deeply involved in hospital operations and provides support services including information technology, billing, executive compensation, contracting, treasury services and supply chain management.
At March 31, 2015, SCHS had $422.5 million of unrestricted cash and investments which equates to 195 days of cash on hand and 165% cash to long-term debt (including MMC's series 2000 bonds). However, system liquidity is pledged to guarantee outstanding bonds of another subsidiary, Sisters of Charity Providence Hospitals (revenue bonds rated 'A'; Stable Outlook) under a guaranty that includes a cash to debt ratio requirement.
Improved Debt Service Coverage
Supported by improved profitability and cash flow, MADS coverage was a sound 2.5x in 2014 and 3x in the interim period. Fitch uses a MADS of $11.3 million, which includes all bonds, notes, and capitalized leases. As calculated under the MTI, MMC covered the $7.8 million MADS on the series 2000 bonds by 3.9x in 2014. Debt burden has moderated with MADS equating to 3.7% of 2014 revenues and 3.3x debt-to-EBITDA.
Gradual Liquidity Growth Expected
At June 30, 2015, MMC reported $59.4 million in unrestricted cash and investments, up 10% from 53.9 million one year prior. Days cash on hand of 75, cushion ratio of 5.3x (based on MADS of $11.3 million) and 68.1% cash-to-debt remain low, but reflect a moderate improvement supported by better cash flow generation. Capital plans are modest and are budgeted around $15 million annually. Fitch expects MMC's liquidity to grow, and approach a level consistent with an investment grade rating in the near- to medium-term.
DEBT PROFILE
MMC has one series of bonds outstanding (series 2000) totaling $68.4 million which generates $7.8 million in annual debt service and is the only debt under the MTI. A sizable amount of capital leases and other debt remain, and including these additional obligations, long-term debt totaled $87.2 million at June 30, 2015 and generated a MADS of $11.3 million.
DISCLOSURE
MMC covenants to provide annual disclosure within 120 days of each fiscal year end, and quarterly disclosure within 45 days of quarter end through the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989256
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989256
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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