Fitch Ratings has assigned an 'A' rating to the approximately $139.1 million Montgomery County Higher Education and Health Authority, hospital revenue bonds, series A of 2012, (Abington Memorial Hospital Obligated Group). In addition, Fitch has affirmed the A rating on Abington Memorial Hospital's (Abington) outstanding debt listed at the end of the press release.
The series 2012A bonds are expected to be fixed rate. In conjunction with this financing, Abington is also issuing $50 million of series 2012B bonds in the form of a direct bank placement with PNC Bank. The proceeds of the series 2012A and B bonds ($189.2 million) plus bond premium ($14.8 million) and the release of a debt service reserve fund ($20.6 million) will be used to refund Abington's series 1998A and 2002A bonds ($173.2 million), fund $49.5 million of capital expenditures, and pay costs of issuance. The series 2012A bonds are expected to price the week of July 16th. Total outstanding debt after this issuance is $353.655 million, 86% fixed rate and 14% variable rate.
The Rating Outlook is Stable.
The bonds are secured by a gross revenue pledge by the obligated group (OG), which includes Abington Memorial Hospital, Abington Health Foundation and Lansdale Hospital. The OG accounted for 100% of the consolidated total operating revenue and total assets of the system.
KEY RATING DRIVERS
GOOD MARKET POSITION: Abington maintains a leading market share in a competitive service area. Abington continues to grow its network through additions to its employed physician group and increasing the number of outpatient sites. Fitch believes the recently announced potential affiliation between Abington and Holy Redeemer Health System (HRHS; rated 'BBB-' by Fitch) poses favorable strategic benefits including better resource utilization and coordination of care in addition to increased market strength. However, the discussions are preliminary (letter of intent stage), and the financial impact of the potential affiliation is uncertain.
SOLID LIQUIDITY: Liquidity is solid with unrestricted cash and investments equating to 248.6 days cash on hand and 134.3% pro forma cash to debt as of May 31, 2012, which compares favorably to the 'A' category median of 194.1 and 113.8%, respectively.
SUSTAINED PROFITABILITY: After a drop in profitability in fiscal 2010, Abington's operating performance improved in fiscal 2011 with a 2.1% operating margin mainly due to its cost reduction initiatives. This trend has been sustained through the 11 mos. ended May 31, 2012 (interim period) with a 1.9% operating margin.
ABOVE AVERAGE DEBT BURDEN: Debt burden is slightly elevated with MADS accounting for 3.4% of total revenue for the interim period. In addition, debt service coverage by EBITDA is adequate at 3.2x for the interim period and 3.3x for fiscal 2011 compared to the 'A' category median of 3.7x.
WHAT COULD TRIGGER A RATING ACTION
CONTINUED IMPROVED PROFITABILITY: Fitch believes that Abington has implemented various revenue enhancement and cost management initiatives, which should result in further improved profitability. Improved profitability and debt service coverage ratios could result in upward movement in the rating.
IMPACT OF AFFILIATION: Fitch will monitor the developments of the affiliation discussions between Abington and HRHS.
Good Market Position in Competitive Service Area
Abington is the market leader in its primary service area (72% of discharges) with 47.1% market share compared to the next closest competitor, Doylestown Hospital with 7.7%. Market share has increased since 2007 with 38.7% due to the additions to the system (Warminster Hospital and Lansdale Hospital) as well as volume growth. Abington has been successful in optimizing these resources within its system by converting Warminster to an outpatient facility and increasing physician staffing at Lansdale.
Fitch believes an area of opportunity is the recently signed letter of intent between Abington and HRHS. HRHS is only two miles from Abington, and Fitch believes the potential benefits include improved coordination of care, resource utilization, and cost savings. Further consolidation is viewed favorably especially since one of Fitch's main credit concerns is the competitive environment. In Abington's PSA, there is still significant outmigration to Philadelphia (over 20% of discharges). In addition, there is increasing competitive pressure with the opening of Einstein Medical Center Montgomery by Abington's competitor, Einstein Healthcare (rated 'BBB+' by Fitch), in September 2012 as well as the new Temple University Hospital and Fox Chase Cancer Center (rated 'BBB-' by Fitch) affiliation.
Growing Employed Physician Strategy
Abington's physician and outpatient network is important to maintaining its market position and improving the coordination of care. Abington currently employs 232 physicians (170 primary care and 62 specialists) compared to 199 (155 primary care and 44 specialists) in 2009. Management plans to continue to grow its employed physician network, which accounts for a vast majority of Abington's volume. Abington continues to pursue ways to align with its physicians including an incentive based contract with one of Abington's largest managed care payors, Independence Blue Cross (IBC).
Minimal Revenue Growth
Abington's weak performance in fiscal 2010 was mainly caused by the reclassification of over 3,000 inpatient admissions to observation cases, which had a significant revenue impact. Improved operating performance in fiscal 2011 and year to date 2012 has mainly been driven by expense reductions as revenue growth was flat for a second consecutive year. Total revenue for the interim period was $716.5 million compared to $717.3 million the same prior year period.
Improved Profitability Expected
Management has identified several areas of opportunity, which include $31 million of cost reductions to be implemented over the next two to three years in the areas of revenue cycle management, labor, supplies, clinical documentation and employed physician management and was the result of a FTI Consulting engagement in 2012. Management expects that these initiatives in conjunction with its physician alignment strategies will improve operating margin to 4% in fiscal 2015.
Fitch would view this trend favorably in light of continued pressure on revenue growth with the ongoing shift of admissions to observations, reduced governmental reimbursement, as well as pressure on managed care reimbursement due to the high managed care leverage in the area. Abington recently negotiated a three-year agreement with Blue Cross that became effective June 1, 2011, which includes quality and cost management incentives. Abington's fiscal 2013 budgeted operating margin is 2.5%.
Manageable Capital Needs
Abington's historical capital spending has been close to depreciation expense over the last three years at about $45 million a year. Capital spending is expected to increase to $50 million in fiscal 2013 and $67 million for fiscal 2014 and includes a free standing cancer center and additional outpatient sites. These capital plans are not expected to impact liquidity due to Abington's solid cash flow in addition to the $50 million of new money proceeds available from the series 2012B bonds. Of the $50 million, at least $25 million will be reimbursement for prior capital expenditures.
Conservative Debt Profile
Abington's debt profile is conservative at 86% fixed rate and 14% variable rate. The only variable rate exposure is the direct bank placement, which is at an indexed floating rate. The direct bank placement is expected to have an initial term of five years, with a put option by the bank in 2017 and no additional covenant requirements than what is required in the master trust indenture.
The Stable Outlook reflects Fitch's expectation that Abington will continue to realize the benefits of its growth strategy and maintain a solid market position, which should translate into improved financial performance.
About the Organization
Abington Memorial Hospital is headquartered in Abington, PA, approximately 14 miles north of Philadelphia. AMH operates a 595 staffed bed acute care hospital on its main campus, the 120 staffed bed acute care Lansdale Hospital, and outpatient campuses in Willow Grove and Warminster. Lansdale was acquired in November 2008. Total revenue for fiscal 2011 (June 30 year-end) was $783.3 million. AMH covenants to disclose annual and quarterly information to the NRMSIRs.
Outstanding debt issued by the Montgomery County Higher Education & Health Authority, PA on behalf of the Abington Memorial Hospital Obligated Group:
--$147,415,000 hospital revenue bonds series 2009A;
--$145,000,000 hospital revenue bonds series 2002A;
--$25,360,000 hospital revenue bonds series 1998A (insured: Ambac Assurance Corp.);
--$16,820,000 hospital revenue bonds series 1993A (insured: Ambac Assurance Corp.).
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from the underwriter.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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