Fitch Ratings has assigned an 'A-' rating to the approximately $102.5 million Cuyahoga County revenue bonds series 2010A issued for MetroHealth. In addition, Fitch has assigned an 'A-' rating to MetroHealth's outstanding debt. The series 2010A bonds are expected to be fixed rate. Total pro forma debt after this issuance is approximately $290 million with 67% underlying fixed rate debt and 33% underlying variable rate demand bonds. The Rating Outlook is Stable.
The proceeds of the series 2010A bonds will be used to refinance its series 1997 bonds and a portion of its 1997A bonds, fund approximately $25 million of capital expenditures, and pay costs of issuance. The bonds are expected to price the week of Nov. 15 via negotiation by Merrill Lynch.
RATING RATIONALE:
--The 'A-' rating reflects MetroHealth's solid market position and integral role as a provider of safety net services in the county, strong community support with the consistent receipt of county appropriations, and improved financial profile.
--The organization is undergoing a significant transformation led by a new leadership team that has been in place less than three years with the implementation of strategic initiatives that have resulted in improved financial performance and should lead to market growth through enhanced access and efficiency.
--As a safety net provider, MetroHealth has an unfavorable payor mix and is more exposed to changes in governmental reimbursement given its reliance on supplemental Medicaid funding.
--MetroHealth's average age of plant is one of the oldest among Fitch's rated credits at 16 years and there is a need for significant reinvestment in the main facility.
KEY RATING DRIVERS:
--MetroHealth's financial profile is on a positive trajectory as the strategic initiatives continue to be realized with improved profitability expected over the next one to two years; however, its five-year capital plan will limit liquidity growth, since no additional debt is anticipated.
--Beyond the next five years, MetroHealth will need to address the replacement or rebuilding of its main facility. Management is currently developing a master facilities plan. The size and scope of its master facility plan as well as the sources of funding could have a material impact on the rating.
SECURITY:
--Debt payments are secured by a gross revenue pledge.
--Financial covenants include maintaining at least 1.1x debt service coverage ratio and 75 days cash on hand.
CREDIT SUMMARY:
The 'A-' rating reflects MetroHealth's solid market position and integral role as a provider of safety net services in the county, strong community support with the consistent receipt of county appropriations, and improved financial profile. The organization is undergoing a significant transformation that has been led by a new chief executive officer (CEO) who joined the system in March 2008. The CEO replaced the entire senior leadership team and management has since implemented four systemwide initiatives that are focused on revenue cycle, operational excellence, market development, and an uninsured strategy. These initiatives have led to an improvement in financial performance through improved managed care contracting, supply chain management, and utilizing lean operational methodology. Growth opportunities include expanding its outreach through better access and care coordination for its patients. These key initiatives are expected to generate at least $125 million of additional cash flow by year five of the transformation.
MetroHealth's financial performance has exhibited a significant improvement in fiscal 2009 compared to the prior years, which has continued through the eight months ended Aug. 31, 2010 (interim period). Operating income has improved to $33.4 million (4.7% operating margin) in fiscal 2009 from $4.4 million (0.6% operating margin) the prior year (includes county appropriations). Through the interim period, operating income was $24.1 million compared to $11 million the same prior year period, and is ahead of budget.
MetroHealth plays an integral role in the county as a safety net provider with over 80% of its discharges originating from Cuyahoga County (unlimited GO bonds rated 'AAA' by Fitch). The health system maintains the leading market share in the county with 11.7%; however, the area is competitive with University Hospitals Case Medical Center capturing 11.4% of the market and Cleveland Clinic with 10.4%. However, MetroHealth maintains strong community support with the consistent receipt of county appropriations. The county appropriations have been funded through two voter approved health and human services tax levies. The two tax levies generate over $200 million in revenue and MetroHealth's share has consistently been approximately $40 million a year. Although these tax levies are not dedicated specifically to MetroHealth, the system has always received a portion of the funds, which is determined solely by the county. In addition, there is strong voter support for the levies, which has passed in every election since 1980 with at least 53% support.
Fitch's main credit concerns include MetroHealth's unfavorable payor mix and exposure to changes in governmental reimbursement and its long-term capital plans. Almost 30% of MetroHealth's gross revenues are from Medicaid, which results in supplemental Medicaid funding of approximately $50 million a year. These funds are expected to be pressured in light of healthcare reform. However, MetroHealth's initiatives to improve access through its ambulatory care network are expected to drive increased revenue and cost savings through better care coordination.
MetroHealth's debt burden is moderate with maximum annual debt service (MADS) comprising 2.8% of total revenue through the interim period and good debt service coverage of 4.3x. MetroHealth has approximately $101 million of variable rate demand bonds; however, cash to puttable debt is strong at 2.3x.
MetroHealth's average age of plant is one of the oldest among Fitch's rated credits at 16 years and significant reinvestment in the main facility is needed. The five year capital plan (Fiscals 2011-2015) totals $420 million and includes $100 million-$125 million for its ambulatory care strategy. The ambulatory care strategy is expected to increase access by adding four new sites. Of the $420 million of capital expenditures, $78.5 million will be funded from bond proceeds (series 2009B and current debt issuance), with the remainder to be funded from cash flow. The rest of the capital plan ($295 million-$320 million) is a placeholder for the need to increase capital reinvestment (capital spending in FY 2014 at 1.6 times (x) depreciation expense and 1.7x in FY 2015). However, the organization is in the middle of a master facility plan and the size and scope has not been finalized. No additional debt is expected within the next several years and management's projected cash flow (after principal payments) is $436 million for FY 2011-2015. Fitch will evaluate the impact of the master facility plan when the plans and sources of funding have been finalized. Fitch believes county support for a rebuild of the main facility would be necessary.
Liquidity has improved with $269 million of unrestricted cash and investments as of Aug. 31, 2010 (149 days cash on hand) from $230 million (132 days) at fiscal year end Dec. 31, 2008. However, balance sheet ratios compare unfavorably to Fitch's 'A' category median of 184 days cash on hand and 106% cash to debt. Pro forma cash to debt is 96% at Aug. 31, 2010. MetroHealth's investment policy is very conservative with 100% invested in cash and fixed income securities.
The Stable Outlook is based on the expectation that MetroHealth will continue to improve its financial profile due to the benefits of its strategic initiatives. Although not expected, a significant reduction in the amount of supplemental Medicaid funding or county appropriations would likely cause negative rating pressure. Fitch will evaluate the impact of MetroHealth's master facility plan on the rating when plans have been finalized.
MetroHealth is owned by Cuyahoga County and the system provides a comprehensive range of services that include a Level I trauma center, Level II pediatric trauma center, Level III neonatal intensive care unit, and regional burn unit. The main facility is MetroHealth Medical Center located in Cleveland, Ohio that operates 564 beds. Total revenue in fiscal 2009 was $674 million (excluding county appropriations). MetroHealth covenants to provide annual audited information within 180 days of fiscal year end and unaudited quarterly financial information within 60 days of quarter end.
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 the Underwriter.
Related Research:
'Revenue-Supported Rating Criteria', dated 8 Oct 2010.
'Nonprofit Hospitals and Health Systems Rating Criteria', dated 29 Dec 2009.
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Contacts:
Fitch Ratings
Primary Analyst
Emily Wong, +1-212-908-0651
Senior
Director
Fitch, Inc.
One State Street Plaza
New York, NY
10004
or
Secondary Analyst
Michael Borgani,
+1-415-371-5026
Director
or
Committee Chairperson
Carolyn
Tain, +1-415-732-7576
Senior Director
or
Media Relations:
Cindy
Stoller, +1-212-908-0526
Email: cindy.stoller@fitchratings.com