Fitch Ratings affirms the 'BBB+' rating on the North Carolina Medical Care Commission's (NCMCC) series 1999 bonds, issued for Stanly Health Services. In addition, Fitch affirms the underlying rating of 'BBB+' on $28.99 million of NCMCC healthcare facilities revenue bonds (Stanly Memorial Hospital Project) series 1996. The series 1996 bonds are insured by Ambac Insurance Corp, which is not rated by Fitch. The Rating Outlook is Stable.
The 'BBB+' rating affirmation is based on Stanly's strong market position, improved liquidity, manageable debt burden, and ongoing relationship with Carolinas HealthCare System (CHS) enhanced by the signing of a 10-year Management Services Agreement Stanly and CHS. Stanly remains the dominant healthcare provider in its primary service area, with an inpatient market of 54.1% in the 11-month interim period ending Aug. 30, 2009. The successful completion of the Stanly Regional West facility has recaptured some outpatient migration, as demonstrated by the improvement in Stanly's outpatient share to 72.4% in 2009 over 71% in fiscal 2008.
Despite the recent decline in unrestricted cash and investments to $30.5 million in fiscal 2008 stemming from investment losses due to market volatility, Stanly saw significant improvement in the 11-month interim period ending Aug. 30, 2009, when cash increased to $38.97 million as their investment portfolio recovered. This equates to 144.7 days cash on hand, and is well above the Fitch 'BBB' median of 113.7 days. Stanly's debt load is light compared to Fitch's 'BBB' median category medians. Maximum annual debt service (MADS) represented just 3.2% of fiscal 2008 revenues, while debt-to-capitalization was a modest 27.0%, both of which compare favorably to Fitch's 'BBB' medians of 3.5% and 49.2%, respectively. MADS coverage by EBITDA fell below Fitch's 'BBB' median of 2.5 times (x), to 2.0x in fiscal 2008. However, improved earnings have increased that coverage to 3.1x at the 11-month interim period. Improved earnings have stemmed from higher patient revenues due to the successful recruitment of several physicians in 2009, as well as from improved management of operating expenses.
Finally, Stanly expanded its 15-year relationship with Carolinas HealthCare System with the commencement of a 10-year Management Service Agreement on March 1, 2009. Located in Charlotte, CHS is a quaternary provider and is the largest health care system in North and South Carolina with over 30 hospitals, either owned or managed. CHS employs key members of the senior management team, provides significant financial oversight, operating and capital budget oversight, and provides the economies and benefits associated with a large health care system including managed care and group purchasing contract assistance and expertise in managing information technology, revenue cycle, and physician practices.
Credit concerns include light operating profitability, costs associated with their employed physician group, and an unfavorable payor mix. Stanly's operating profitability measures have historically lagged Fitch 'BBB' category medians. From fiscal 2003-2008, Stanly's average excess margin of 0.8% and operating margin of (-0.2)% were both weaker than Fitch's 'BBB' medians. In fiscal 2008 Stanly suffered both an operating and bottom line loss with a negative operating margin of (-1.9)% and an negative excess margin of (-1.5)% in fiscal 2008, largely due to significant investment losses and increased bad debt expense. This compares unfavorably to Fitch 'BBB' medians of a 1.0% operating margin and 2.2% excess margin.
Stanly has since demonstrated improved performance, generating a 2.2% excess margin and a 1.9% operating margin in the 11-month interim period, both of which compare favorably to the 'BBB' median metrics. In addition, Stanly's relatively weak operations are in part attributable to the significant costs associated with employed physicians and an unfavorable payor mix. The employed physician group generated an operating loss of (-$2.3) million in fiscal 2008, although management notes a $700,000 improvement in the 11-month interim period in year-over-year comparison, due in large part to improved operating revenues and flat expenses. In fiscal 2008, Medicaid and self-pay accounted for a high 15.2% and 7.8% of Stanly's gross revenues, respectively. This position is largely unchanged in 2009, with Medicaid and self-pay contributing 15.7% and 7.2% to gross revenues, respectively. Overall, continued demonstration of improved operating performance will be necessary to support a 'BBB+' rating; failure to sustain that performance may result in negative rating pressure.
The Stable Outlook reflects Fitch's expectation that Stanly will continue to generate increased patient revenues and improve overall profitability, while maintaining sufficient liquidity. A failure to accomplish the aforementioned may result in negative rating pressure.
Stanly Health Services and Affiliates is located in Albemarle, NC. The obligated group includes Stanly Memorial Hospital (119-bed acute care hospital), Stanly Manor (100-bed long-term care facility), and Stanlex Inc. (home health agency). The Stanly Obligated Group provides annual and quarterly disclosure to the Municipal Securities Rulemaking Board through the Electronic Municipal Market Access System (EMMA), including balance sheet, income statement and utilization statistics, but does not include management discussion and analysis.
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