SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on Valley Medical Center's (VMC) outstanding revenue bonds, which are listed at the end of this release.
The Rating Outlook is Stable.
SECURITY
Debt payments are secured by a pledge of net revenues of Valley Medical Center, which exclude property tax revenue. In addition, there is a debt service reserve fund.
KEY RATING DRIVERS
CONTINUED GROWTH IN VOLUME: Volume growth continues to be consistently strong especially on the outpatient side with modest growth in inpatient volume. Profitability improvement has been sustained with a 7% operating EBITDA margin through the nine months ended March 31, 2016, 8.6% in fiscal 2015, and 8% in fiscal 2014 after weak performance in fiscal 2013 (3.3% operating EBITDA margin) and 2012 (5.6% operating EBITDA margin).
STRATEGIC ALLIANCE WITH UNIVERSITY OF WASHINGTON: VMC is a member of the University of Washington Medicine Health System (UW Medicine), which Fitch views favorably especially in the competitive service area. VMC is part of any narrow/accountable care networks that UW Medicine forms and notably, is part of the employer offered accountable care organization agreement with Boeing that also includes other providers such as MultiCare (rated 'AA-') and Seattle Children's (rated 'AA'). This network was also recently offered to state employees.
WEAK LIQUIDITY METRICS: VMC's days cash on hand (DCOH) has lagged the 'BBB' category medians with 130.5 DCOH at March 31, 2016. Liquidity growth may be constrained due to an expected increase in capital spending to more normal levels after very low capital spending in fiscal 2014 and 2015. The low spending in recent years was after more robust spending in prior years.
REBOUND IN TAX REVENUE: VMC has taxing ability as a district hospital and has issued the majority of its debt through limited tax general obligation bonds (LTGO). Due to statutory caps in the state, the amount of property tax levied can be insufficient to cover its LTGO debt service and therefore Fitch evaluates VMC's debt burden on a revenue-only and all in (revenue and LTGO) basis. As of calendar year 2015, the LTGO debt is self-supporting compared to the prior three years, when tax revenue was insufficient to cover LTGO debt service.
STRONG DEBT METRICS ON REVENUE BONDS ONLY: Debt metrics on a revenue bond only basis are strong with very good coverage levels at 6.3x in fiscal 2015 compared to 2.4x for all debt.
RATING SENSITIVITIES
STABLE FINANCIAL PROFILE: Valley Medical Center's financial profile has stabilized after a period of stressed performance mainly due to its Epic implementation. Fitch expects Valley Medical Center to maintain current performance and does not expect upward or downward rating movement in the next year.
CREDIT PROFILE
VMC is a public entity with taxing ability and comprises a 321 licensed bed hospital; nine primary care clinics in the South King County area; five urgent care clinics; and 24 specialty clinics. VMC is a member of UW Medicine. In fiscal 2015, VMC had $515.7 million of total operating revenue.
Strong Volume Growth
VMC has sustained its strong volume growth, which mainly started in fiscal 2015 largely related to Medicaid expansion. Through the nine months ended March 31, 2016, primary and urgent care clinic visits were up 8.3% compared to the prior year period, specialty care clinic visits increased 7.6%, surgery cases were up 6.9% and discharges increased 1.7%. Net patient service revenue increased 9% through the nine months ended March 31, 2016 compared to the prior year period, while total operating expenses were up 10.7%. Operating margin was 0.8% through the nine months ended March 31, 2016 and VMC is ahead of budget year to date. Fitch believes VMC's operating performance has stabilized after a period of stressed performance in fiscal 2012-2013 related to the implementation of Epic.
Weak Liquidity Metrics
Liquidity metrics have improved from a low at fiscal year end 2013, however, are still light for the rating level. Unrestricted cash and investments were $186.9 million at March 31, 2016 compared to $129.8 million in fiscal 2013, translating to 130.5 DCOH, 60.3% (total debt) and 237.7% (revenue debt only) at March 31, 2016 compared to 108.9 days, 39.2% and 159.7%, respectively in fiscal 2013.
Capital spending was much lower in fiscal 2014 and 2015 due to more robust spending in prior years. However, capital spending is expected to increase, which may constrain future liquidity growth. Capital spending totaled $20.1 million through the nine months ended March 31, 2016, $12.3 million in fiscal 2015 and $13.3 million in fiscal 2014. Capital spending is projected to total $35 million in fiscal 2016, $65 million in fiscal 2017 and $45 million in fiscal 2018. The capital plan includes strategic projects as well as ongoing IT upgrades and equipment replacement.
Competitive Market
The service area is very competitive and VMC is located between Seattle and Tacoma. There is increasing competition in one of VMC's main markets, Covington, as a competitor (MultiCare) has plans to add inpatient capacity in that market. Currently, VMC has a strong outpatient presence in that area with urgent care, primary and specialty clinics. MulitCare currently has a freestanding emergency room and plans to add inpatient beds by 2017. Fitch will monitor the competitive landscape but views VMC's position as part of UW Medicine as a mitigant to the competitive environment.
Debt Profile
VMC had $237.2 million of LTGO bonds and $78 million revenue bonds outstanding as of June 30, 2015. The debt portfolio is 100% fixed rate. VMC has had to backfill funds for LTGO debt service repayment as the amount of tax that was levied was subsequently statutorily reduced and insufficient to cover the LTGO debt service requirements. This reversed beginning in calendar year 2015 due to improved assessed valuations and the amount of property tax levy is currently sufficient to cover LTGO debt service.
Since there can be a shortfall in funds necessary to cover LTGO debt service, Fitch evaluates debt metrics on total debt as well as revenue bonds only. Maximum annual debt service (MADS) on total debt outstanding is $26.5 million and MADS on revenue bonds only is $7.4 million (BABs at gross interest). MADS coverage by EBITDA on all debt was adequate at 2.4x in fiscal 2015 and through the nine months ended March 31, 2016. MADS coverage by EBITDA for revenue bonds only was much stronger at 5.8x through the nine months ended March 31, 2016, 6.3x in fiscal 2015 and 5.4x in fiscal 2014. Bond covenants require at least 1.25x MADS coverage on revenue bonds only.
Disclosure
VMC covenants to provide annual disclosure within 150 days of fiscal year end and quarterly disclosure within 45 days of quarter end to the Municipal Rule Making Board's EMMA system.
Outstanding Debt:
--$17.5 million Public Hospital District No. 1 of King County, Washington (Valley Medical Center) Hospital Facilities Revenue Bonds series 2010A (Tax-Exempt);
--$61.2 million Public Hospital District No. 1 of King County, Washington (Valley Medical Center) Hospital Facilities Revenue Bonds series 2010B (Federally Taxable Build America Bonds (BABs).
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=1004559
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004559
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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