NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to the $70,865,000 Montgomery County Higher Education and Health Authority Health Care Revenue Bonds series 2016A issued on behalf of Holy Redeemer Health System, PA (HRHS).
Additionally Fitch has affirmed the 'BBB' rating on the following series of bonds issued by Montgomery County Higher Educational and Health Authority on behalf of HRHS:
--$30,000,000 series 2006A;
--$46,320,000 series 2014A.
The Rating Outlook is Stable.
The series 2016 bonds are expected to be issued as fixed-rate, tax-exempt bonds and sold via negotiation the week of Oct. 10. Proceeds will be used to refund the Montgomery County Higher Education and Health Authority Health Care Revenue Bonds series 2006A for savings and fund $50 million of system capital needs.
SECURITY
Debt payments are secured by a pledge of the gross receipts of the obligated group and a mortgage on the Holy Redeemer Hospital and Medical Center (HRHMC). Fitch bases its analysis on the consolidated system, which includes both obligated and non-obligated entities. In fiscal 2016 (draft audit, year-end June 30), the obligated group (OG) accounted for 82.9% of consolidated system assets and 78.3% of system operating revenues. The issuer is considering potential restructuring of the OG structure, subject the requirements of the HRHS Master Trust Indenture. Since Fitch bases its analysis on the consolidated system, the agency would view any changes as neutral to its analysis.
KEY RATING DRIVERS
THINNER 2016 OPERATING RESULTS: Operating income of $956,000 was weaker than $5.5 million in fiscal 2015 but only slightly behind the budgeted $1.3 million. While HRHS' 0.2% operating and 6.5% operating EBITDA margins were below Fitch's 'BBB' medians of 1.5% and 8.7%, respectively, the maintenance of the current rating is based upon the management's expectation of improved performance over the next two years. The fiscal 2017 budget is conservatively set at a $3 million loss (0.7% negative operating margin), but management is focused on managing expenses in order to produce break-even performance. Moreover, the organization's board expects a return to positive operations by fiscal 2018.
SOLID LIQUIDITY: The system's liquidity metrics have historically been solid and favorable to the 'BBB' medians. Unrestricted cash and investments at June 30, 2016 were reported at $186.9 million, translating to 183.7 days cash on hand (DCOH) and 13.1x cushion ratio. Due to the inclusion of $50 million of new money for projects in the series 2016A transaction, cash to debt is expected to decline to 114.3% from 164.7% at 2016 year-end. The system has a relatively aggressive asset allocation, but this is partially offset by a conservative debt structure with approximately 90% of its debt in fixed rate mode post issuance and front loaded debt service.
REVENUE DIVERSIFICATION: Fitch views the system's diversified service lines, which include acute care, long-term care, and robust home care presence as a credit strength, providing an attractive platform for population based health care delivery model.
MANAGEABLE DEBT BURDEN: While the system's coverage of pro-forms MADS by EBITDA in 2016 was slightly lower at 2.5x than Fitch's 'BBB' median of 3x, MADS as percent of revenues is manageable at 3.5% and consistent with the category median. Fitch employs MADS for the consolidated system; the coverage of the OG MADS is slightly higher at 2.8x.
RATING SENSITIVITIES
NEED FOR STRONGER OPERATING PERFORMANCE: Failure of Holy Redeemer Health System to return to positive operating performance over the next two years, with coverage closer to the 'BBB' rating category or a material deterioration in liquidity would likely produce negative rating pressure.
CREDIT PROFILE
HRHS' obligated group consists of Holy Redeemer Hospital and Medical Center (HRHMC), a 250 licensed-bed acute care hospital in Meadowbrook, PA, approximately 20 miles from downtown Philadelphia), St. Joseph Manor (St. Joseph), a 66 unit assisted living and 296 skilled nursing facility (SNF) bed facility, Lafayette Redeemer (Lafayette), a Type C continuing care retirement community (CCRC) with 296 independent living units (ILUs) and 120 SNF beds, Hospice, Home Care presence in both Pennsylvania and New Jersey and HR Physician Services. The consolidated system includes a number of non-obligated entities, including home care agencies and senior living facilities. In fiscal 2016, (year-end June 30, draft audit) the consolidated system had $392 million of revenues, a 5% increase over the prior year.
New Issue Details
The series 2016 bonds are expected to be issued as fixed-rate, tax-exempt bonds and sold via negotiation the week of Oct. 10. Proceeds will be used to refund the Montgomery County Higher Education and Health Authority Health Care Revenue Bonds series 2006A for savings and fund $50 million of system capital needs. The final maturity of the series 2016A is Oct. 1, 2036 and maximum annual debt service (MADS) of $13.9 million, provided by the underwriters, occurs in 2017. The refunding is expected to generate net present values savings estimated at $6.6 million. A debt service reserve will not be funded in for the series 2016A bonds.
The principal projects for which the 2016 transaction will provide partial funding include a much needed memory care facility (60-70 beds) which will be constructed across from HRHMC ($10 million) and expected to be completed in 2019, ambulatory expansion, upgrades to the non-acute care facilities and various improvements at HRHMC, which are estimated at $15-18 million.
Weaker Fiscal 2016 Results
The consolidated system reported operating income of $956,000 for fiscal 2016, slightly lower than the budgeted $1.3 million. Contributing to the lower profitability was a significant increase in malpractice insurance, higher employee benefits expense, increased supply costs and continued investment in physician recruitment. HRHMC's admissions were 7.6% lower in 2016, but ambulatory surgery registered a solid 9.7% increase. Despite operating in the highly competitive north Philadelphia market, HRHMC was able to maintain its market share at a stable 11.5%.
While the budget for 2017 is a loss of $3 million, management views it as conservative and is committed to work towards producing a break-even year end. The board also expects a return to positive operating performance by 2018, which Fitch views as possible given strategic initiatives being planned and implemented.
Revenue Diversification
HRHS continues to operate in a competitive and over bedded market. Fitch views HRHS' platform, which includes the entire spectrum of inpatient and outpatient services, including long term care, and home health and hospice care in both Pennsylvania and New Jersey, as uniquely positioned as the delivery model moves closer to population health management. HRHS continues to pursue ambulatory and outpatient expansion strategy. The addition of two ambulatory in Warminster (2017) and Richboro (2018) to the current four should further help solidify market share. HRHS participates in Tandigm, a company which manages primary care practices with over 300 locations in southeast Pennsylvania. The relationship with Tandigm has enabled HRHMC to participate in Tandigm's performance based contracts.
Effective June 30, 2016, HRMC has exited from the Delaware Valley ACO, where it was a 9% partner with two Philadelphia providers, but will continue to participate until 2016 calendar year-end in the Medicare Shared Savings Program. In May 2016 HRMC and Doylestown Hospital founded the Community Collaborative of Pennsylvania and New Jersey (CCC) ACO, which will be the region's only community Tier 1 hospital based ACO. The two partners filed for an ACO in Medicare Savings Program to start Jan. 1, 2017. Management anticipates this to be accretive to operations with covered lives estimated at 30,000 initially.
Holy Redeemer already has two collaborative relationships intended to reduce outmigration for tertiary services to Philadelphia - with Temple Health in neurology and neurosurgery and Sidney Kimmel Cancer Center at Jefferson Health in cancer. An agreement was signed recently with MDAnderson to evaluate HRHMC for potential participation, under the auspices of the MDAnderson Cancer Center at Cooper University Hospital, in MDAnderson's model which provides access to MDAnderson's cancer expertise and clinical treatment plans. If approved, management would anticipate the impact of the relationship in 2018.
Solid Liquidity
Cash and unrestricted investments were reported at $186.9 million at June 30, 2016; the liquidity metrics of 183.7 DCOH, 13.4x cushion ratio and cash to debt of 164.7% were all favorable to the 'BBB' category medians of 161.2 DCOH, 11.7x cushion and 90.8% cash to debt. The $50 million of new money in the series 2016A transaction will have the effect of reducing cash to debt to 114.3% on a pro forma basis, but by providing partial funding of the organizations' capital plan, which combined with historical level of cash flow, should allow for absolute liquidity to remain at a stable level. The system's investment portfolio has an aggressive asset allocation with 40% in alternative investments and private equity. Offsetting this concern is the system's conservative debt structure and absence of swaps. Furthermore, there is no life care or health care liability associated with St. Joseph's and Lafayette.
Debt Profile
Despite relatively thin profitability, the system generated a still adequate coverage of pro forma MADS by EBITDA of 2.5x in fiscal 2016. The $13.9 million pro forma MADS includes debt outside of the OG, some of which is non-recourse to HRHS. The OG had a higher coverage at 2.8x. MADS uses the Master Trust Indenture provisions for smoothing bullet maturities, which are outside of the OG. Holy Redeemer's debt structure is very conservative and relatively short, 90% of its debt is fixed rate and all material debt matures by 2036 (debt service after 2016 is a mere $615,000).
Disclosure
HRHS covenants to provide audited annual financial statements within 120 days of each fiscal year end and quarterly disclosure within 60 days of each fiscal quarter end. Quarterly disclosure consists of management discussion, balance sheet, income statement, cash flow statement, 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/site/re/750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/site/re/866807
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012597
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