NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' rating on the following Iowa Finance Authority bonds issued on behalf of Pella Regional Health Center (PRHC):
--$46.7 million health facilities revenue bonds, series 2006.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of gross revenues of the obligated group and a first-priority mortgage on certain property.
KEY RATING DRIVERS
STRONG BALANCE SHEET: The affirmation primarily reflects PRHC's strong balance sheet and improving liquidity metrics, which have grown consistently over the past seven years. PRHC's strong balance sheet helps offset the risks associated with a small revenue base. As of fiscal 2015, unrestricted cash and investments increased to $64.6 million which equates to 315.7 days cash on hand (DCOH), 18x cushion ratio, and 143.7% cash-to-debt. All these liquidity ratios far exceed Fitch's 'BBB' medians.
SUSTAINED OPERATING PERFORMANCE: PRHC's critical access hospital (CAH) designation provides beneficial Medicare and Medicaid reimbursement, which has supported operating profitability and consistent revenue growth. At fiscal 2015, PRHC had a 3.6% operating margin and a 12.8% operating EBITDA margin.
LEADING MARKET POSITION: PRHC has remained a market leader in Marion County which is attributed to its CAH designation and successful recruitment of physicians. Additionally, positive service area economics have helped lead to low levels of bad debt, self-pay, and Medicaid exposure relative to its peers.
DIMINISHING DEBT BURDEN: The affirmation is further supported by PRHC's declining debt burden, as debt-to-EBITDA fell to 3.2x in fiscal 2015, which is lower than Fitch's 'BBB' median of 4.4x. While MADS as a percentage of total revenue remains elevated at 4.3%, future debt issuance is not anticipated, which should help to further reduce its debt burden.
SMALL REVENUE BASE: A primary credit concern remains PRHC's small revenue base which leaves it susceptible to volatility in its medical staff, utilization trends, and reimbursement methods.
RATING SENSITIVITIES
CONTINUED LIQUIDITY GROWTH AND STRONG OPERATIONS: If strong operating performance is sustained and liquidity continues to grow, it could result in positive rating momentum.
CRITICAL ACCESS PROGRAM: The critical access program has been a target for reductions at the federal level and any adverse modifications to this program could put negative pressure on PRHC's rating.
CREDIT PROFILE
PRHC is located in Pella, IA, in Marion County, approximately 50 miles southeast of Des Moines. PRHC is a critical access hospital with 25 acute care beds, seven medical clinics, and the Pella Hospital Foundation. Total revenues were $82.9 million in fiscal 2015.
STRONG LIQUIDITY MITIGATES SMALL REVENUE BASE
PRHC's unrestricted cash and investments increased to $64.6 million in fiscal 2015, more than double the $29.9 million it had in fiscal 2010. This strong liquidity position resulted in 315.7 DCOH, 18x cushion ratio, and 143.7% cash-to-debt, all higher than the 'BBB' medians of 161.5 days, 11.1x, and 89.5%. While PRHC has steadily improved its liquidity position, management anticipates funding an expansion of its OB unit through internal sources, which is expected to have an adverse impact on its liquidity ratios. Despite this capital expenditure, PRHC is still expected to maintain liquidity ratios which far exceed the 'BBB' medians.
PRHC's solid liquidity position, together with its strong operating performance, has helped mitigate concerns over its small, albeit growing, revenue base. A continuation of strong operating performance and liquidity growth would be viewed positively and could lead to upward rating movement.
ROBUST CASH FLOW
PRHC continued its strong operating performance in fiscal 2015 by producing an operating margin of 3.6% and an operating EBITDA margin of 12.8%. PRHC's ongoing strong operating performance is attributed to its CAH designation and expanding geographic footprint though primary care clinical access. Outpatient volumes increased by 9.3% and surgical volumes increased by 15.8% in fiscal 2015 from fiscal 2014 levels. Additionally, as of the first-quarter interim period ending March 31, 2016, outpatient and surgical volumes are up by 3.6% and 15.8%, respectively, over prior interim period levels.
DWINDLING DEBT BURDEN
All of PRHC's debt is fixed-rate and it has no current plans for additional debt. PRHC has further reduced its debt burden in fiscal 2015 as debt-to-EBITDA dropped to 3.2x, which is lower than the 'BBB' median of 4.4x. MADS is approximately $3.6 million, which equates to an elevated 4.3% of fiscal 2015 revenues when compared to the 'BBB' median of 3.6%. However, MADS coverage by EBITDA remains strong at 3.2x in fiscal 2015.
DISCLOSURE
PRHC covenants to provide annual and quarterly disclosure to the Municipal Securities Rulemaking Boards EMMA system, consisting of a management discussion and analysis, balance sheet, income statement, state of cash flows, and utilization statistics.
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=1005198
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005198
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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