CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the following bonds expected to be issued by the Hospital Authority of Hall County and the City of Gainesville (the authority) on behalf of Northeast Georgia Health System (NGHS):
--$221,280,000 revenue anticipation certificates, series 2017A;
--$150,000,000 revenue anticipation certificates, series 2017C
Fitch has also affirmed the 'A' rating on approximately $388 million of bonds issued by the authority on behalf of NGHS. Fitch has withdrawn the 'A' rating on the series 2014C bonds as the issuance was consolidated in with the series 2014B bonds.
In addition to the series 2017A/C bonds, NGHS expects to issue approximately $188 million of series 2017B bonds. The series 2017B bonds, in addition to the security described below, will be secured by a limited property tax pledge by Hall County, GA of up to seven mills. Fitch will assign a separate rating on the series 2017B bonds based on this support.
The series 2017A/B bonds are expected to be issued as fixed rate bonds and the series 2017C bonds are expected to be issued as variable rate bonds. Bond proceeds will be used to refund all or a portion of NGHS's outstanding series 2010A and series 2010B bonds, to fund various capital projects, to reimburse for prior capital expenditures and to pay costs of issuance. The series 2010A/B fixed rate refunding will be dependent upon market conditions at the time of pricing. The series 2010A/B debt service reserve funds are expected to be released upon refunding, reducing the refunding par. Pro forma maximum annual debt service (MADS) is expected to equal approximately $55.6 million and is level through 2047. The series 2017A/B/C bonds are expected to price the week of Jan. 9 through negotiation.
The Rating Watch Evolving has been removed as the ratings on NGHS are not subject to a variation to the 'US Nonprofit Hospitals and Health Systems Rating Criteria'.
The Rating Outlook is Stable.
SECURITY
Bond payments are secured by a pledge of the gross revenues of the obligated group and a leasehold mortgage on certain properties, including the NGMC - Gainesville.
KEY RATING DRIVERS
STRONG OPERATING CASH FLOW: NGHS's strong profitability is a key credit strength which helps to mitigate the system's heavy debt burden. Profitability remains strong, although at lower than historical levels, with operating EBITDA margin equal to 14% in fiscal 2016, easily exceeding Fitch's 'A' category median of 10.3%.
STRONG MARKET POSITION: NGHS operates the only two hospitals in its primary service area (PSA) of Hall County, GA and holds a dominant 81.8% market share. Further, the service area has exhibited strong population growth which is expected to continue through 2020 at nearly double the rate of Georgia.
HIGH DEBT BURDEN: NGHS's debt burden has moderated due to strong revenue growth but remains high with pro forma MADS equal to 5.3% of fiscal 2016 revenue. Despite the strong profitability, MADS coverage by EBITDA of 2.8x in fiscal 2016 is light relative to Fitch's 'A' category median of 4.5x.
MIXED LIQUIDITY METRICS: Unrestricted liquidity increased 20% since fiscal 2014 to $795 million at Sept. 30, 2016 and will be bolstered by $75 million of reimbursement from the series 2017 bonds. Pro forma liquidity metrics are strong relative to operating expenses with 338 days cash on hand but are light relative to debt with 15.6x cushion ratio and 88.4% cash to pro forma debt.
RATING SENSITIVITIES
SUSTAINED STRONG CASH FLOW: Fitch expects that Northeast Georgia Health System will sustain its strong operating profitability, providing adequate cash flows to provide for consistent coverage metrics. A deterioration in cash flow and debt service coverage could result in negative rating pressure.
CREDIT PROFILE
NGHS, headquartered in Gainesville, GA, approximately 53 miles northeast of Atlanta, operates a total of 657 acute care beds under a single hospital license on two hospital campuses (NGMC - Gainesville and NGMC - Braselton). NGMC - Braselton opened in April 2015 on time and on budget and is located approximately 17 miles from NGMC - Gainesville and 45 miles northeast of Atlanta. Additional operations include an employed multispecialty physicians group, a physician-hospital organization (PHO) network and two skilled nursing facilities. Total consolidated operating revenues increased 35% since fiscal 2014 to $1.05 billion in fiscal 2016. The strong revenue growth reflects increased volumes, the strong population growth in the service area and the opening of NGMC - Braselton. The obligated group accounted for 87% of consolidated operating revenue and 96% of total consolidated assets in fiscal 2016.
NGHS signed a definitive agreement to acquire Barrow Regional Medical Center, a 56 bed hospital located in Winder, GA. The transaction is expected to close on Dec. 31, 2016 after which the hospital will be renamed NGMC - Barrow.
STRONG OPERATING CASH FLOW
Operating profitability remains strong but has decreased from historical levels. Operating EBITDA margin averaged 17.8% between fiscal 2009 and fiscal 2014 but decreased to 12% in fiscal 2015 and 14% in fiscal 2016. Despite the compression, operating EBITDA margin remains strong, well exceeding Fitch's 'A' category median of 10.3%. The compression in fiscal 2015 reflects the start-up costs for NGMC - Braselton. Fiscal 2016 results reflect increased expenses related to the implementation of a new IT system. Management is projecting operating EBITDA margin to equal 14.1% in fiscal 2017, reflecting dilution from the Barrow acquisition, and to incrementally increase each year to 16.6% in fiscal 2021. The system's strong operating profitability reflects effective cost management practices, increasing volumes and NGHS's leading market share in its service area.
STRONG MARKET POSITION
NGHS holds a dominant 81.8% market share in its PSA of Hall County, GA. No other hospital holds greater than 3% market share in the PSA. NGHS operates the only two hospitals in the PSA, with the closest competitor located 25 miles away. Hall County accounted for 43% of admissions in 2016. Additionally, NGHS holds a leading 26.3% market share in its secondary service area with Northside Hospital holding 16.3% market share. No other competitor holds greater than 10% market share. The system's total market share increased each year to 44.2% in 2016 from 36.7% in 2012. The growth reflects growth in both the SSA and the Braselton market.
HIGH DEBT BURDEN
Despite the increase in pro forma debt, NGHS's debt burden is lower than historical levels due to the system's strong revenue growth. However, the pro forma debt burden remains high. NGHS's high debt burden reflects heavy capital spending to meet the growing population. Pro forma MADS is equal to 5.3% of fiscal 2016 revenue, nearly double Fitch's 'A' category median of 2.7%. In comparison, the system's prior MADS equaled 7.7% of fiscal 2013 revenues. The high debt burden requires the maintenance of strong cash flow to support coverage metrics. Despite the strong cash flow, MADS coverage by EBITDA and operating EBITDA of 2.8x and 2.6x in fiscal 2016 are light relative to Fitch's 'A' category medians of 4.5x and 3.9x, respectively.
Approximately 42% of NGHS's pro forma debt is backed by a Hall County tax pledge, including the series 2017B bonds, series 2014A bonds and the series 2010B bonds (expected to be refunded by the series 2017B bonds). Pursuant to an intergovernmental agreement, the county is required to levy up to 7 mills to pay debt service if hospital system revenues are insufficient.
MIXED LIQUIDITY METRICS
Unrestricted cash and investments increased 20% since fiscal 2014 to $795 million at Sept. 30, 2016. The increase reflects the system's strong profitability and cash flows. Unrestricted liquidity will be further bolstered by $75 million of reimbursement proceeds from the series 2017C bonds, increasing pro forma liquidity to $870 million. Pro forma liquidity metrics, including reimbursement, are strong relative to operating expenses with 338 days cash on hand, exceeding Fitch's 'A' category median of 215.5. However, despite the growth over the past three years, pro forma liquidity remains light relative to NGHS's heavy debt burden with 15.6x cushion ratio and 88.4% cash to pro forma debt, comparing unfavorably with Fitch's 'A' category medians of 19.4x and 148.6%.
Capital spending is expected to be moderate, averaging $143 million (141% of depreciation) over the next five years, allowing for further liquidity growth. Capital projects will be funded by approximately $75 million of series 2017C proceeds and cash flow. Unrestricted liquidity is projected to continue to increase over the next five years.
DEBT PROFILE
Subsequent to the series 2017 bond issuance, NGHS will have approximately $984 million of bonds outstanding. Total pro forma par outstanding reflects the expected release of the series 2010A/B debt service reserve funds. Approximately 42% of NGHS's pro forma bonds outstanding are backed by the Hall County tax pledge. The pro forma debt profile will include approximately 66% underlying fixed rate bonds and 34% underlying variable rate bonds. NGHS is counterparty to three fixed payor swaps and a basis swap, including two fixed payor swaps entered into in October 2016, effectively converting approximately 19% of the total bonds to a synthetic fixed rate. No collateral was required to be posted at Sept. 30, 2016.
DISCLOSURE
NGHS covenants to provide annual and quarterly disclosure. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.
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=1016686
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016686
Endorsement Policy
https://www.fitchratings.com/regulatory
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