CHICAGO--(BUSINESS WIRE)--Fitch Ratings maintains its Rating Watch Negative on the following revenue bonds issued by the New Mexico Hospital Equipment Loan Council on behalf of Rehoboth McKinley Christian Health Care Services, Inc. (RMCHCS), which are currently rated 'B'.
--$5.6 million hospital facility improvement and refunding revenue bonds, series 2007A.
SECURITY
The bonds are secured by a pledge of revenues and equipment and a debt service reserve fund.
KEY RATING DRIVERS
CONTESTED SUPPLEMENTAL PAYMENTS: In July 2016, RMCHCS received notice that reimbursement received under Medicare's Low Volume Adjustment (LVA) program from fiscal 2013 through fiscal 2016 were in error and that Medicare would recoup payments for those years beginning in July 2016. RMCHCS is contesting this decision. The Rating Watch Negative reflects the potential negative impact of Medicare's intention to recoup prior year LVA payments on RMCHCS' liquidity and working capital position.
WEAK LIQUIDITY POSITION: At July 31, 2016, RMCHCS reported unrestricted cash and investments of $5.8 million equal to 35 days cash on hand (DCOH). According to management, a total of $1 million has been recouped by CMS in July and August relating to payments made in fiscal years 2014 and 2016. There is $900K of 2015 tentative cost report yet to deal with of which $802K relates to LVA. To offset the recoupment and to comply with its liquidity covenant (30 DCOH), RMCHCS has accessed a $1.2 million line of credit in August.
SMALL REVENUE BASE: Fitch believes RMCHCS' small revenue base remains a key credit concern as the hospital has limited flexibility to handle adverse events.
SOLID OPERATING RESULTS: RMCHCS operating results improved sharply in 2015 with a 2.2% operating margin compared to a negative 13.3% operating margin in 2014. Excluding approximately $2.5 million of tax revenues that were not available for debt service, coverage of maximum annual debt service by EBITDA improved to solid 4.4x in 2015. Through the seven months ended July 31, operating margin was 2.5%.
RECEIPT OF FORBEARANCE AGREEMENT: In Fitch's prior rating action dated March 8, 2016, the resolution of the Rating Watch Negative was predicated on receipt of the forbearance agreement by RMCHCS. According to management, a forbearance agreement has been received which eliminates the risk of acceleration related to the debt service coverage violation in 2014. The receipt of this agreement has been factored into the rating; however, Fitch has requested but has not yet received a copy of this agreement.
RATING SENSITIVITIES
IMPACT OF LOW VOLUME ADJUSTMENTS: Despite improved operating results in 2015 and through the seven month interim period, Rehoboth McKinley Christian Health Care Services' working capital position remains precarious. The impact of Medicare's intention to recoup payments made under the Low Volume Adjustment for prior years could result in a violation of its DCOH covenant (30 days) and hamper the corporation's ability to fund operations. Resolution of the impact of the prior year's cost reports is needed to remove the bonds from Rating Watch Negative.
CREDIT PROFILE
Rehoboth McKinley Christian Health Care Services, Inc. is a 60-bed general acute care hospital located in Gallup, NM (138 miles west of Albuquerque, NM and 180 miles east of Flagstaff, AZ). Total operating revenue in fiscal 2015 was $58.6 million.
DISCLOSURE
Rehoboth covenants to provide annual financial statements within 30 days after the approval of the report by the state auditor, which has usually resulted in fairly late receipt of audits. RMCHCS has also been posting monthly financial statements on EMMA.
Additional information is available on www.fitchratings.com
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/site/re/866807
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011417
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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