NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded to 'AA-' from 'A+' its rating on approximately $19.7 million in series 2012 revenue bonds issued by the Mt. Lebanon Hospital Authority (Allegheny County, PA) on behalf of St. Clair Hospital (SCH) .
The Rating Outlook is revised to Stable from Positive.
SECURITY
The bonds are secured by a pledge of gross revenues.
KEY RATING DRIVERS
ROBUST FINANCIAL PROFILE: The upgrade to 'AA-' is supported by SCH's financial profile, which is characterized by solid profitability, strong debt service coverage and a robust liquidity position. Most of SCH's metrics exceeded Fitch's 'AA' category medians in fiscal 2015 and through the 11-month interim of 2016 (ended May 31, 2016).
LOW DEBT BURDEN: The upgrade also reflects SCH's low and declining debt burden. SCH's maximum annual debt service of $4.1 million represented just 1.3% of fiscal 2015 revenues, favorable to Fitch's 'AA' median of 2.4%. Additionally, Debt to EBITDA of 1.0x and Debt to Capitalization of 14.9% in fiscal 2015 were both well ahead of the respective 'AA' medians of 2.4x and 28.1%.
LEADING POSITION IN A COMPETITIVE MARKET: SCH holds a leading in-patient market share of 41% (up from 39% in 2013) in its primary service area (PSA). Management continues to focus on physician alignment and strong quality indicators which help set it apart within the competitive Pittsburg market.
SMALLER REVENUE BASE: SCH is exposed to operational and competitive risks inherent to a single-site hospital with a smaller revenue base of about $305 million, compared to the 'AA' median of $2.04 billion. Fitch expects SCH's performance to outpace the 'AA' medians going forward, which will help mitigate risks of operating volatility associated with its smaller revenue base.
RATING SENSITIVITIES
OPERATING STABILITY EXPECTED: Fitch expects St. Clair Hospital to continue producing strong operating results that will support liquidity and debt service coverage ahead of the 'AA' medians.
CREDIT PROFILE
SCH is a 328-licensed and 303-staffed-bed hospital located in Mt. Lebanon, PA, a suburb approximately six miles from downtown Pittsburgh. Total revenue in fiscal 2015 (June 30 year-end) was $305 million.
SCH, which is the primary subsidiary of the parent organization St. Clair Health Corp., is the sole member of the obligated group. As of June 30, 2015, SCH represented 89.6% of total operating revenues and 96.8% of total assets of the consolidated group. Fitch's analysis is based on the consolidated entity.
ROBUST FINANCIAL PROFILE
The upgrade to 'AA-' is supported by SCH's consistently strong operating profitability, as evidenced by an average operating margin of 5.3% from fiscal 2012 to fiscal 2015, ahead of the 'AA' median of 4.9%. Similarly, operating EBITDA margin averaged 11.8% over the last four fiscal years, above the 11.5% median. Profitability has been driven by solid volumes, continued physician alignment, and a strong reputation for quality in the market place.
Positive operating performance over the last five years has allowed SCH to grow its unrestricted liquidity position, which has improved to $216.8 million at May 31, 2016 from $156.4 million at June 30, 2012. SCH's liquidity metrics were very strong in relation to debt with 53.4x cushion ratio and 499.2% cash to debt at May 31, 2016, significantly ahead of Fitch's 'AA' medians of 27x and 201.7%, respectively. Days cash on hand (DCOH) of 283 was in line with the median of 289.4 days. In addition to building its balance sheet position, SCH has continued to reinvest in its facilities as evidenced by consistent capital spending which has averaged 145% of depreciation over the last four audited years. SCH is in the process of developing a longer-term Master Facilities Plan, but capital expenditures are expected to be at around 130% of depreciation over the medium term.
SCH's debt burden remains low as evidenced by MADS as 1.3% of annualized 2016 revenues through the 11-month interim. In addition, debt service coverage has been significantly ahead of the 'AA' median over the last four years and was at 12x through the interim, above the 5.7x median.
LEADING POSITION IN A COMPETITIVE MARKET
SCH continues to hold a leading market position in its PSA, which has improved slightly since 2013 due to continued physician alignment and focus on creating greater access to primary care in the region. Quality and a strong reputation remain the main areas of focus for management, as they make SCH an attractive choice from the perspective of patients and industry partners.
The PSA and the overall Pittsburg metropolitan area is a very concentrated managed care market, dominated by Highmark Blue Cross Blue Shield, which remains a negative credit factor. SCH has well-established relationships with all area payors and has been successful in re-negotiating contracts with favorable terms in the past, which mitigates some of Fitch's concern.
DEBT PROFILE
SCH's approximately $42 million of total outstanding debt is 84% fixed and 16% variable-rate. The series 2007 notes ($6.9 million) are indexed floaters and series 2010 note ($15.2 million) is a fixed-rate private placement. All outstanding bonds are on parity and SCH has no outstanding swaps.
DISCLOSURE
SCH covenants to provide annual audited financial information to bondholders and Fitch as well as quarterly information to the MSRB's EMMA system. Additionally, management was candid and timely in its responses to Fitch throughout the credit review process.
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=1008819
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008819
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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