NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB+' rating on the following bonds issued by the Decatur Hospital Authority on behalf of Wise Regional Health System, TX (Wise):
--$94.1 million revenue bonds, series 2014A.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by the gross revenues of the Decatur Hospital Authority's hospital facilities, a fully funded debt service reserve fund, and a first lien and mortgage on certain property and land on which the Decatur Hospital Authority's hospital facilities are located.
KEY RATING DRIVERS
MODERATELY HIGH DEBT POSITION: Wise's debt burden, while high is decreasing. Maximum annual debt service (MADS) of $9.4 million is equal to 4.2% of revenues in fiscal 2015 (unaudited Dec. 31 year-end), down from 5.3% in fiscal 2013. Fitch deducts Wise's nursing facility revenue from this calculation. Additionally, debt to capitalization dropped to 53.8% in fiscal 2015, from 62.9% in fiscal 2013.
MODEST, BUT IMPROVED LIQUIDITY: Unrestricted cash and investments of $66.5 million at Dec. 31, 2015 translate to a weak 51.5% of debt, just lower than Fitch's below investment grade median of 52.2%. However, days cash on hand (DCOH) at 126 days is better than the below investment grade median of 85.9 days. These liquidity metrics are improved from fiscal 2013 levels of 41.4% cash to debt and 112.4 DCOH.
INCREASED PROFITABILITY: Partially due to increasing volumes and benefits from supplemental payments, operating profitability improved to robust levels in fiscal 2015. The operating and operating EBITDA margins were a healthy 10.7% and 19.1%, respectively in fiscal 2015.
GOOD MARKET POSITION: Wise's primary service area inpatient market share was good at 57.1% in 2014. There is not any other inpatient providers located in Wise County and no other single hospital has an inpatient market share greater than 10%. Fitch views the system's positive volume trends and strong market presence, bolstered by the opening of the 12-bed Parkway Surgical and Cardiovascular Hospital in 2014, as a credit strength.
EXPANSIVE CAPITAL SPENDING: The system is constructing a $15 million rehabilitation and sports medicine facility on the main Decatur East campus, partially funded with $10 million from the series 2014A bond proceeds. There may be additional expansion plans in the near-to-medium term, the largest of which is the addition of a new bed tower to the Decatur East Campus. However, the plans remain preliminary and are dependent on sustained volume growth and increases in financial resources.
RATING SENSITIVITIES
CASH FLOW MAINTENANCE: Fitch expects Wise Regional Health System to continue its healthy operating performance and strong debt service coverage despite potential modifications to supplemental payment programs. Upward rating movement could occur if these trends are maintained.
LIQUIDITY BALANCES AND DEBT MODERATION: Continued growth in liquidity metrics and debt moderation that is more in line with investment grade results could lead to upward movement in the rating. At the current rating level, Wise Regional Health System has limited debt capacity, unless the robust profitability continues and financial resources grow further.
CREDIT PROFILE
Wise is a healthcare system headquartered in Decatur, TX and owned and operated by the Decatur Hospital Authority. The authority is not a taxing district and the system is not supported by taxes. Wise operates a 148-bed general acute care hospital which is split into two campuses, the West Campus and the East Campus, in Decatur located about 40 miles northwest of downtown Fort Worth. In addition, Wise operates a campus in Bridgeport, TX, as an outpatient facility and in May 2014 opened the 12-bed Parkway Surgical and Cardiovascular Hospital in the northern section of Fort Worth, TX. Wise reported $321.8 million in total revenues for the unaudited fiscal 2015 period (Dec. 31 year-end). Wise's total revenue includes $93.39 million of skilled nursing revenues from its affiliation with 13 nursing homes under various lease agreements.
IMPROVED EARNINGS AND CASH FLOW
As a result of increased volumes, benefits form lower average lengths of stay, a better payor mix and higher supplemental payments, operating profitability improved in fiscal 2015. Admissions, ambulatory surgeries, and outpatient visits increased 3.5%, 20.8%, and 19.9% respectively, from fiscal 2013-2015. Operating income jumped to $28.3 million in fiscal 2015 from $13.9 million in the prior year. About $10.3 million of the gain was from additional supplemental payments from governmental programs. As a result of the healthier earnings, MADS coverage jumped to 5.1x in fiscal 2015 from 3.2x the year earlier. Without the benefit of $3.9 million of Minimum Payment Amount Program (MPAP) funds described below, MADS coverage remains healthy at 4.7x in fiscal 2015.
SUPPLEMENTAL PAYMENT PROGRAMS
Wise receives supplemental payments from the Texas Medicaid Waiver program, which is set to expire on Sept. 30, 2016. It is expected that the program is extended for a short period while a permanent solution is negotiated among the state of Texas and the federal government. Wise received $20.3 million in fiscal 2014 and $23 million in fiscal 2015, and budgeted to receive $19 million in fiscal 2016. While Wise has traditionally relied upon these funds for its operating earnings, Fitch notes the system's positive performance without these monies in fiscal 2015. While Fitch does not expect an elimination of this funding mechanism, a cutback or adjustment is possible. Wise's continued ability to operate profitably without these funds would be a positive credit factor.
Wise also participates in the MPAP, which allows nursing homes to receive additional Medicaid funds. Wise leases 13 nursing homes under the program which are being operated by existing operators through management agreements. By virtue of the lease agreements, each long-term care provider qualifies as a 'non-state-government operated nursing facility' and is eligible to receive higher reimbursement payments. These supplemental payments are shared among the nursing facilities and Wise through the fee paid to manage the operations. Wise received $1.1 million of MPAP funds in 2014, $3.9 million in fiscal 2015 and expects to receive approximately $6 million in fiscal 2016. The MPAP program is scheduled to end on Feb. 28, 2017 and be replaced with a new program approved by the state of Texas, the Quality Incentive Payment Program (QIPP). QIPP will focus on providing enhanced payments to nursing providers that develop and implement quality improvement programs. Fitch expects that payments under QIPP have the potential to be reduced or modified, but it is not a credit concern since the nursing facility agreements are not a core hospital function. The fiscal 2015 operating margin without accounting for the nursing facility operations is higher at 10.7%, versus 8.8% when including the $93.39 million of nursing facility revenues and $89.43 million of nursing facility fees.
MODEST, BUT IMPROVED LIQUIDITY METRICS
As a result of the higher earnings and debt financed capital projects, Wise's liquidity position has materially improved over the last few years. Unrestricted cash and investments almost doubled to $66.5 million at Dec. 31, 2015 from $33.8 million in fiscal 2012. At 2015 year-end, the system's reported cash and unrestricted investments that equated to 126 DCOH, above the below investment grade median of 85.9 days, and a cushion ratio of 7.0x, which is also above with 5.7x below investment grade median. Fitch also notes Wise's above average days in accounts receivable balances of 80.3 days at the end of fiscal 2015 which is an opportunity for enhanced cash collections. Fitch's calculation of DCOH eliminates the expenses of the nursing facilities from the MPAP, as Wise is not liable for costs beyond the management fees, which are paid from the nursing facility revenues.
EXPANSIVE CAPITAL PLANS
A current project is to construct a 69,000 square foot rehabilitation and sports medicine facility adjacent to the main Decatur East Campus. The $15 million cost will be partially funded with $10 million from the series 2014A bond proceeds. Construction commenced last year and costs increased by about $2 million over projected levels. Project completion is expected for late 2016. Other capital projects over the next few years are an ambulatory surgery center at its Bridgeport campus, and another new surgical and cardiovascular hospital in Argyle, TX. To moderate capital costs and align with physicians, the Argyle campus is expected to be constructed and managed by outside parties. Wise will initiate an operating lease for the Argyle campus upon its completion in 2018. Wise is also restructuring its Parkway Surgical and Cardiovascular Hospital with outside managers and investors. As a result, Wise will repay its $13 million capitalized lease on the Parkway facility and also enter into an operating lease for the campus.
Wise has exhibited a fairly aggressive growth strategy and has preliminary capital plans in the medium term to accommodate projected business growth. Management has early plans for a possible second tower to be built on their East Campus in as soon as three years. The approximate cost of the project could be as high as $62 million, $22 million of which is expected to be funded from cash on hand. Fitch acknowledges the necessity of such expansion projects, but notes that Wise has limited debt capacity at the current rating level, unless the robust profitability continues and financial resources grow further.
DISCLOSURE
Wise covenants to provide annual disclosure of audited financial statements within four months of the fiscal year end and quarterly disclosure of interim financial statements within 45 days of the quarter end. Annual and quarterly disclosure reports are filed on 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
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