Fitch Ratings has affirmed the 'BBB-' rating on the following bonds
issued by the
Grundy County Industrial Development Authority on behalf of Wright Memorial Hospital (WMH):
--$29.9 million health facilities revenue bonds, series 2009.
The Rating Outlook is Stable.
The bonds are secured by a pledge of the unrestricted receivables of the JB Wright Trust (the Trust, owner of WMH and obligor on the bonds), a debt service reserve, and a mortgage lien on hospital property. The bonds are payable primarily from lease payments received by the Trust from Saint Luke's Hospital of Trenton (SLHT), a wholly-owned subsidiary of Saint Luke's Health System (SLHS). SLHS guarantees these lease payments by SLHT.
KEY RATING DRIVERS
SAINT LUKE'S AFFILIATION IS KEY STRENGTH: The 'BBB-' rating is based primarily on WMH's relationship with SLHS, via an operating agreement with SLHS's wholly-owned subsidiary SLHT. SLHT has operated WMH since 1995 via the agreement, which affords WMH many benefits including a guaranty of lease payments of no less than debt service on the series 2009 bonds through 2023.
OPERATING STRUCTURE RISK: The guaranty and operating agreement does not extend through the maturity of the bonds (2034), which Fitch views as a credit risk. The current term of the operating agreement is through 2023 with automatic five-year renewal periods. After the initial term SLHS can terminate the lease with a one-year notice unless there is an event of default.
WEAKENED OPERATING PERFORMANCE: WMH's operations have significantly deteriorated in 2011, which continued through the six months ended June 30, 2012 (interim period) with a -5.3% operating loss and 8.5% operating EBITDA margin through June 30, 2012.
DEPLETED LIQUIDITY: WMH's unrestricted cash and investments dropped to $1.7 million at June 30, 2012, as a result of capital expenditures and information technology investments related to its replacement facility; however, the liquidity drop is greater than anticipated due to weak cash flow. Fitch notes the JB Wright Trust had an additional $1 million in unrestricted liquidity in 2011.
WHAT COULD TRIGGER A RATING ACTION
CONTINUATION OF OPERATING AGREEMENT: WMH's investment grade rating assumes the extension of the operating agreement beyond the current expiration in 2023, and an ongoing relationship with SLHS.
The key rating factor in support of the 'BBB-' rating continues to be WMH's affiliation with SLHS, via an operating agreement which provides for significant benefits including strategic support, management expertise, contract leverage, and a guaranty of lease payments to the Trust equal to debt service requirements on the series 2009 bonds. The guaranty exists in conjunction with the operating agreement, which runs until 2023, with five subsequent automatic renewal periods of five years each.
Although this guaranty is not secured under a master indenture note, it acts as a guarantee by SLHS of debt service payments through 2023 (the bonds mature in 2034). While not publicly rated by Fitch, internal analysis of audited fiscal 2006-2011 and three-month interim 2012 data confirmed SLHS's solid credit profile.
Fitch is concerned with the significant decline in WMH's financial profile through the six-month interim period ended June 30, 2012, following weak performance in fiscal 2011. A continued weak financial profile could place enhanced risk on SLHS's willingness to renew the operating agreement past 2023. Lower than expected clinical volumes following the opening of the new hospital in April 2011 coupled with higher costs contributed to a -7.6% operating margin in 2011 and -5.3% operating margin in interim 2012.
WMH's liquidity remains very weak, declining to $1.8 million in unrestricted cash as of June 30, 2012, equating to a very light 24.5 days cash on hand (DCOH) against Fitch's 'BBB' category median of 122.2 DCOH. This decline is the result of capital expenditures for radiology equipment and information technology infrastructure associated with the new hospital, which has been funded through cash given its weak cash flow. Fitch notes that a $1.3 million Medicare payment received in July 2012 will help replenish WMH's balance sheet.
WMH completed its replacement project in the first quarter of 2011, and has no plans for additional debt. WMH's future capital needs are minimal.
The Stable Outlook is based on SLHS's ongoing affiliation with WMH, and SLHS's guaranty of lease payments for debt service through 2023 on the series 2009 bonds. Additionally, new leadership at WMH expects that successful physician recruitment and associated volumes coupled with enhanced Medicare reimbursement will generate improved cash flow in 2012 and 2013. Fitch notes that further erosion in WMH's overall financial profile could place downward pressure on the rating.
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 2011 were $24.3 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. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
This action was informed by the sources of information identified in the 'Revenue-Supported Rating Criteria'.
Applicable Criteria and Related Research:
'Revenue-Supported Rating Criteria', dated Jun. 20, 2011.
'Nonprofit Hospitals and Health Systems Rating Criteria', Jul. 23, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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