SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on the approximately $18.375 million Sierra View Local Health Care District (Tulare County, California) revenue refunding bonds series 2010.
The Rating Outlook is Stable.
SECURITY
Debt payments are secured by a gross revenue pledge.
KEY RATING DRIVERS
STRONG LIQUIDITY: The affirmation of the 'A' rating and Stable Outlook largely reflects Sierra View's strong balance sheet with 472.2 days cash on hand and 263.1% cash-to-debt at Dec. 31, 2015. Cash-to-debt has significantly improved since Fitch's last review in April 2014 due to the reduction in debt as part of the refinancing of the series 2007 bonds in 2015. Fitch expects the balance sheet to remain strong.
WEAK DEBT SERVICE COVERAGE: Debt service coverage has historically been low for the rating level due to Sierra View's heavy debt burden. Maximum annual debt service (MADS) of $7.5 million equates to a high 5.5% of fiscal 2015 total revenues (June 30 year-end) as compared to 'A' category median of 2.8%. Coverage of MADS by EBITDA was 2.7x and 2.4x in fiscal 2015 and 2014, respectively, and has declined through the six months ended Dec. 31, 2015 to 1.7x.
VOLATILE OPERATING PERFORMANCE: Sierra View's profitability has been solid but volatile with 5.8% operating margin in fiscal 2015, 3.8% in fiscal 2014, 6.2% in fiscal 2013 and 11.9% in fiscal 2012. Through the six months ended Dec. 31, 2015, Sierra View posted an operating loss with a negative 2.1% operating margin. This is expected to be temporary, as Sierra View has invested in various service lines which should result in improved revenue in the near term. In addition, Sierra View receives approximately $7 million-$8 million in Medicare and Medi-Cal disproportionate share funds a year.
MASTER FACILITY REDESIGN UNDERWAY: Sierra View is in the planning stages of addressing its seismic retrofit regulatory requirements, which were eased and led to a new plan being developed. Prior plans are now being re-evaluated and a final plan is expected in 2017-2018. Management is contemplating a general obligation bond issue (would require voter approval) to fund these needs. Sierra View still has approximately $17 million of bond funds remaining for capital expenditures.
CHALLENGING SERVICE AREA: Sierra View's revenue base is small and its operations in a relatively rural service are challenging, with a difficult payor mix of 40% of gross revenue from Medi-Cal.
RATING SENSITIVITIES
IMPROVE OPERATING PERFORMANCE: Fitch expects Sierra View Local Health Care District to improve the weak interim profitability as a result of its strategic investments in various service lines that should lead to improved revenue growth. A sustained decline in debt service coverage would likely result in negative rating pressure.
FINALIZED MASTER FACILITY PLAN: Fitch will evaluate the impact of the revised master facility plan and planned sources of funding on Sierra View Local Health Care District's rating when details are available.
CREDIT PROFILE
Sierra View owns and operates a 167-licensed-bed acute care hospital (199 including dialysis chairs), 35-bed long-term care facility, and several outpatient clinics. The hospital is located in Porterville, California, approximately 70 miles southeast of Fresno. Sierra View had total operating revenue of $137.7 million in fiscal 2015. The current CEO and CFO have been in place for about three years and are focused on enhancing services to meet the community's needs.
Strategic Investments
Several strategic initiatives are underway, which has pressured operating performance through the six months ended Dec. 31, 2015 due to start-up costs and initial investments. After prior failed attempts to bring in a hospitalist group, there is now a hospitalist team in place since April 2015, which is expected to lower length of stay, improve documentation and result in better throughput in the emergency department. Sierra View opened a urology clinic in October 2015 in partnership with University of Southern California, which should fill an underserved need. Additional programs under way include a cardiac catheterization lab and an urgent care facility, which should open in late spring 2016.
Master Facility Plan
Sierra View is currently re-evaluating its master facility due to the changes in the state seismic requirements and expects to have a finalized plan in 2017-2018 that would leave sufficient time to meet the 2020 deadline. Sierra View expects to retrofit existing space for earthquake mitigation. In addition, there are other capital needs including a new building for the IT department and the expansion of the emergency department. Sierra View is contemplating a general obligation bond issue to fund these needs, which would require voter approval. Fitch will evaluate the impact of the revised master facility plan and planned sources of funding on Sierra View's rating when details are available.
Strong Liquidity
Sierra View's 'A' rating has been supported by its strong liquidity with $160 million in unrestricted cash and investments at Dec. 31, 2015. Although the master facility plan is still in its preliminary stages with funding sources to be determined, Fitch believes a material equity contribution for its master facility plan would be a credit concern and would result in negative rating pressure.
Series 2015 Refinancing
In 2015, Sierra View refinanced its series 2007 bonds and used approximately $10 million in project funds to reduce the amount of debt outstanding. The refinancing is privately held with a final maturity in 2030 and no additional covenants.
Total outstanding debt was $61 million at Dec. 31, 2015 and is 100% fixed rate. Sierra View has almost $4 million in note payables, which results in a front-loaded debt structure. MADS of $7.519 million occurs in fiscal 2017. MADS coverage was 2.7x in fiscal 2015, 2.4x in fiscal 2014, 2.7x in fiscal 2013 and 3.3x in fiscal 2012 compared to the 'A' category median of 4.2x.
Volatile Profitability
The operating performance volatility can be somewhat attributable to the variability in supplemental funding, which includes disproportionate share funds, meaningful use funds, and provider fees. Fiscal 2015 performance improved from the prior year due to increased volume and reduced self-pay, and total revenue increased 7% after a two-year decline. Sierra View also receives approximately $1 million a year in tax revenue for operating purposes (reclassified to other operating revenue).
The operating loss in the first six months ended Dec. 31, 2015 is related to the start-up costs and strategic investments in addition to an increase in agency staffing expense due to its high nurse vacancy rate. Sierra View has recruited new grads this year and expects this expense to continue to decline through the rest of the year. The fiscal 2016 budget is for an operating margin of 3.1%, which is not likely to be reached. However, through February 2016, operating losses were held at the same level as in December.
Challenging Service Area
The hospital does maintain a dominant market share in its service area, which has garnered favorable managed care reimbursement to date; however, the socio-economic indicators are challenging with 40% of its gross revenue from Medi-Cal.
Disclosure
The district covenants to provide annual and quarterly disclosure through the Municipal Rule Making 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
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002027
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