Fitch Ratings has affirmed the following rating:
--Approximately $30 million Grundy County Industrial Development Authority Health Facilities revenue bonds, series 2009, affirmed at 'BBB-'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The 'BBB-' rating is supported by Wright Memorial Hospital's (WMH) historical relationship with Saint Luke's Health Trenton (SLHT), a wholly-owned subsidiary of Saint Luke's Health System (SLHS) in Kansas City (rev bonds not rated by Fitch). SLHT has operated WMH since 1995 via an operating agreement, which is currently in place for 12 years post occupancy of the replacement hospital. In addition to the many benefits WMH accrues through the affiliation with SLHS, the operating agreement also includes a guaranty of lease payments equal to debt service requirements on the bonds.
--Lending further credit strength is Wright Memorial Hospital's (WMH) solid and consistent operating profitability, which is fundamentally based on its critical access hospital designation (CAH).
--The replacement hospital project is progressing on budget, if slightly behind schedule, and should strengthen WMH's competitive position in the service area. Furthermore, WMH has no plans for additional debt.
KEY RATING DRIVERS:
--While the operating agreement with SLHT does not extend to the full maturity of the series 2009 bonds in 2034, there is no option to terminate within the initial term of 12 years, and the agreement has five subsequent automatic renewal periods of five years each. WMH's investment grade rating assumes its relationship with SLHS will extend well beyond the current term of the operating agreement (ending in 2023).
--Fitch also believes a primary rating driver for WMH is its CAH designation. Given WMH's historical performance and the importance of such providers, Fitch believes WMH is in no danger of losing this designation, nor are detrimental changes to the program anticipated over the near to medium term.
SECURITY:
The bonds are secured by the unrestricted receivables of the JB Wright Trust, and payable primarily from lease payments received by Wright Memorial Hospital from SLHT, a wholly-owned subsidiary of SLHS. In addition, SLHS guarantees these lease payments by SLHT. Further security is provided by a mortgage and security interest in property, and a debt service reserve fund.
CREDIT SUMMARY:
The rationale for the 'BBB-' rating is based primarily on WMH's long-term affiliation with St. Luke's Health System (SLHS) in Kansas City, its critical access hospital (CAH) designation ensuring enhanced revenue from Medicare which has buoyed profitability, the progression of the replacement hospital on budget and largely on time, and WMH's modest capital needs going forward.
A primary credit strength continues to be WMH's long-term affiliation with Saint Luke's Health System (SLHS) in Kansas City, which is sealed by a long-term operating agreement between WMH and SLHT which includes a guaranty by SLHS of debt service payments through the life of the agreement. The current operating agreement is effective Sept. 30, 2009 (closing of 2009 bond financing) through 12 years after the replacement facility is occupied and operational (estimated February 2011, therefore the agreement would term in February 2023). The operating agreement has five, five-year automatic renewal periods, and the notice period for terminating the agreement is one year for either party. Debt service payments are paid from the lease payments from SLHT to WMH. Under the agreement, SLHS guarantees the lease payments to WMH, which should afford the hospital significant lead time to bolster its revenue stream and cash position in advance of the expiration of the agreement in 2023. As Fitch expects WMH and SLHS to continue their affiliation beyond the initial term of the agreement, concerns regarding WMH's ability to strengthen its financial profile at a level consistent with investment grade upon expiration of the agreement are alleviated. Consequently, any deterioration in the relationship between SLHS and WMH would likely yield rating pressure.
The 'BBB-' rating is further supported by WMH's CAH designation, which has allowed WMH to generate consistently solid operating profitability and cash flow. Despite flat patient volumes in 2009, an increase in patient case mix and length of stay coupled with management expense control, enabled WMH to generate a 5.3% operating margin and 6.5% EBITDA margin. Completion of the hospital is expected in February 2011, slightly behind initial projections of November 2010; however the project is within budget, with additional security in place via a guaranteed maximum price agreement. Once the replacement project is complete in 2011, increased operating expenses (including depreciation expense) related to the debt and the operations will be partially offset by increased reimbursement under Medicare which should further bolster EBITDA margins going forward.
Credit concerns continue to be WMH's small revenue base, high debt burden, and regulatory risk associated with changes to the Critical Access Hospital program. WMH's small revenue base and small overall physician complement limits its financial flexibility against fluctuations in operations. WMH's debt profile is significant, as demonstrated by debt to EBITDA of 20.2 times(x) and MADS a high 11.1% of revenue in 2009, metrics which compare unfavorably to Fitch's 'BBB' rated medians. However, debt service coverage is currently supported by the lease payments within the operating agreement with SLHT, which is further enhanced by the guarantee of lease payments by SLHS. Fitch expects WMH's financial profile will improve over time. Furthermore, WMH has no additional debt plans.
WMH is a critical access hospital located in Grundy County, approximately 85 miles northeast of Kansas City, Missouri. Other services include outpatient clinics, inpatient and outpatient surgery, and a rehabilitation program. Total revenues in 2009 were $22.7 million. WMH covenants to provide audited annual financial statements 180 days after the year-end close and quarterly disclosure 45-days after the quarter close to bondholders via the Electronic Municipal Market Access system (EMMA). Annual disclosure will consist of a balance sheet, income statement, medical staff, revenue sources, and utilization statistics.
Additional information is available at www.fitchratings.com.
In addition to the sources of information identified in the report 'Revenue-Supported Rating Criteria', this action was additionally informed by information from Wright Memorial Hospital, Citizens Bank & Trust as Trustee, and Stern Brothers & Co. as Underwriter.
Related Research:
'Revenue-Supported Rating Criteria', dated Aug. 16 2010
'Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
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