NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to the following County of Christian, Kentucky, Hospital Revenue Bonds (Jennie Stuart Medical Center Project), issued on behalf of Jennie Stuart Medical Center (JSMC):
--$55.5 million series 2016.
In addition, Fitch has affirmed the following ratings:
-$60.1 million of series 2006 (remarketed in 2008).
The Rating Outlook remains Negative.
The series 2016 bonds are expected to be issued as fixed rate. Proceeds, together with proceeds of an approximately $10 million taxable bank loan and an equity contribution, will be used to advance refund all of the series 2006 bonds, fund certain capital improvements, create a debt service reserve fund (DSRF), and pay for costs of issuance.
SECURITY
The bonds will be secured by a pledge of gross revenues, a first mortgage lien on certain property and a DSRF.
KEY RATING DRIVERS
ONGOING NEGATIVE PERFORMANCE: Maintenance of the Negative Outlook is driven by JSMC's three years of negative operating performance. In 2015, JSMC had a negative 6.1% operating margin ($7.0 million operating loss) and a 3.0% operating EBITDA margin, both significantly below Fitch's 'BBB' category medians of 1.5% and 8.7%, respectively. Operating margin improved slightly to a negative 3.9% through the nine-month interim (ended Sept. 30, 2016).
IMPROVED DEBT BURDEN: Post issuance, JSMC's maximum annual debt service (MADS) drops to $4.4 million, representing a manageable 3.6% of total annualized revenues through the interim. Pro forma debt to capitalization of 41% is favorable to Fitch's 'BBB' median of 50.2%. The lower MADS results in improved debt service coverage of 1.9x through the interim, still unfavorable to Fitch's median of 3.0x, but improved from 1.3x in 2015.
ADEQUATE LIQUIDITY POSITION: At Sept. 30, 2016, JSMC's $52.5 million in unrestricted cash and investments, equated to 161.4 days cash on hand (DCOH) and a 12x pro forma cushion ratio, both in line with Fitch's 'BBB' medians of 161.2 days and 11.7x, respectively. Pro forma cash to debt of 80.6% was slightly unfavorable to the 90.8% median. Pro forma cash to debt does not incorporate the impacts of the potential equity contribution and the expected reimbursement for prior capital from the 2016 issuance. Liquidity has remained largely stable over the last three years and is a key credit strength at the rating level.
VANDERBILT AFFILIATION: JSMC signed an affiliation agreement with Vanderbilt University Medical Center (Vanderbilt) in 2016, with JSMC becoming part of Vanderbilt's Clinically Integrated Network. Under the agreement, Vanderbilt will assist JSMC with several specialty service lines including oncology and cardiology. Fitch views the affiliation positively and believes it should benefit JSMC's quality indicators, physician specialty coverage, and financial results over the medium term.
LEADING MARKET POSITION: JSMC's has a leading market share of 66.7% in its primary service area (PSA), which has remained stable over the last three years. However, the service area remains economically challenged, as JSMC's payor mix consisted of 23.3% Medicaid in 2015.
RATING SENSITIVITIES
OPERATING IMPROVEMENT NEEDED: The 'BBB-' rating on Jennie Stuart Medical Center is contingent upon operating improvements in 2016 and 2017 and continued stability of liquidity levels. Failure to improve operating profitability and coverage to levels more consistent with the 'BBB' category will likely result in a downgrade.
CREDIT PROFILE
JSMC is a 194 licensed bed inpatient acute care hospital located in Hopkinsville, Kentucky, approximately 70 miles north of Nashville, Tennessee. JSMC had total operating revenues of $113.9 million in 2015.
WEAK OPERATING PERFORMANCE
JSMC's operating losses of $8.1 million in 2014 and $7.0 million in 2015 equated to negative 7.4% and 6.1% operating margins, respectively. The operating losses are attributed to declining inpatient volumes and significant losses at JSMC's employed physician practice. Management has developed a cost reduction and process streamlining initiative in regards to its physician group in 2015. The initiative is currently being implemented and all physician contracts that come up for renewal are being reviewed and renegotiated to reflect current market conditions and productivity. Other initiatives center around vendor contract renegotiations and volume improvements.
JSMC's operating margin improved slightly to a negative 3.9% through the nine-month interim period, and management is budgeting to end 2016 with a negative 3.2% operating margin.
JSMC was approved for Sole Community Provider (SCP) status in April of 2016. The annual benefit going forward should be in excess of $800,000. Furthermore, JSMC received approval for reclassification into the Nashville MSA effective October of 2016, which will increase its wage class index reimbursement level, with an estimated net operating benefit of approximately $1.3 million annually. Neither the SCP status nor the MSA reclassification is incorporated in the 2016 budget. Fitch views the realization of the financial benefits from both programs as essential to maintaining the rating.
IMPROVED DEBT BURDEN
JSMC's pro forma MADS represents a manageable 3.6% of total annualized revenues through the interim period, equal to Fitch's 'BBB' median. Pro forma debt to EBITDA improved to 7.9x through the interim due to better operating performance, but still remained unfavorable to Fitch's median of 4.3x. Lower MADS and better operating performance helped improve pro forma debt service coverage to 1.9x through the interim period, still below the 3.0x median, but improved from 1.3x in 2015 and 1.2x in 2014.
Capital spending has been tempered over the last three years, averaging at just 57% of annual depreciation. Lower CapEx resulted in an increased average age of plant of 15.6 years in 2015, unfavorable to Fitch's median of 11.4, and indicative of deferred capital spending. Management is not planning any large capital expenditures over the medium term, and the new money from the 2016 issuance will fund up to $8.3 million in future capital, which should help JSMC further build its liquidity.
DEBT PROFILE
The series 2016 bonds and the taxable bank loan will be issued as fixed rate and will have the same financial covenants. The bank loan fully amortizes over a 15 year period. The advance refunding of the 2006 bonds will allow for the release of the Assured Guaranty insurance.
CONTINUING DISCLOSURE
JSMC covenants to disclose audited annual information within 150 days of fiscal year end to the Municipal Securities Rulemaking Board's EMMA system. JSMC also discloses quarterly statements to EMMA, and Fitch notes that disclosure has been timely and thorough.
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
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015154
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015154
Endorsement Policy
https://www.fitchratings.com/regulatory
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