As part of its continuance surveillance effort, Fitch Ratings has downgraded to 'BB+' from 'BBB' the following rating:
--Approximately $79,987,000 Cuyahoga County, OH, hospital facilities revenue bonds, series 2000 (CSAHS/UHHS - Canton, Inc. nka Mercy Medical Center).
The Rating Outlook is Negative.
KEY RATING DRIVERS
Severely Weakened Profitability: The downgrade and Negative Outlook reflects Mercy Medical Center's (MMC) substantial operating loss ($17.4 million loss from operations; negative 6.6% operating margin) in 2010 which has continued through the seven month interim period ended July 31, 2011 ($13.1 million operating loss; negative 8.5% operating margin).
Declining Liquidity Metrics: Through the seven month interim period, MMC's liquidity position has deteriorated significantly from fiscal year end. At July 31, 2011, the hospital had $57.7 million of unrestricted cash and investments which calculates to 81.4 days of cash on hand (DCOH), a 7.4 times (x) cushion ratio and 76.8% of cash to debt.
Declining Debt Service Coverage: As per the Master Trust Indenture (MTI), MMC generated a very thin 1.1x coverage of maximum annual debt service in 2010. Further deterioration in operations could result in a rate covenant violation in fiscal year 2011.
Support of Sponsor: In January 2010, Sisters of Charity of St. Augustine Health System (CSAHS) (revenue bonds rated 'A' by Fitch) became the sole corporate member of MMC. Although it is not obligated to repay the debt of MMC, Fitch views the solid financial resources of and the strong operational support from CSAHS as a positive credit factor.
Declining Historical Inpatient Utilization: MMC's admissions declined approximately 7.1% between 2009 and 2010. However, utilization trends are beginning to show modest signs of stabilization through the interim period.
SECURITY
The bonds are secured by a pledge of the gross revenues of the obligated group, consisting of MMC only, and a first lien mortgage of hospital property.
WHAT WOULD TRIGGER A DOWNGRADE?
--Failure to meet the rate covenant for fiscal year 2011;
--Evidence of continued financial deterioration including increased operating losses and/or declining liquidity ratios.
CREDIT PROFILE
The downgrade reflects MMC's failure to generate sufficient cash flow from operations to support the rating at the current rating level due to large operating losses, declining liquidity metrics and weak debt service coverage. A further downgrade is precluded at this time because of the solid financial resources and the strong operational support provided to the hospital by its parent, CSAHS.
CSAHS has been the owner of MMC since the hospital's inception. In January 2010, the ownership was restructured and CSAHS became the sole corporate parent of MMC. Although CSAHS is not legally obligated for MMC's outstanding debt, the system has been deeply involved in hospital operations and recently engaged Price Waterhouse Cooper to initiate an operational improvement plan. CSAHS (revenue bonds rated 'A' by Fitch) has a solid balance sheet with strong liquidity metrics. At March 31, 2011, the system had $470 million of unrestricted cash and investments which equates to 248.1 DCOH, a 38.6x cushion ratio and 206.02% cash to long-term debt (including MMC's series 2000 bonds).
MMC has budgeted a $13.5 million operating loss for fiscal year (FY) 2011 which Fitch feels is very optimistic given the hospital's current financial position; for the seven months ending July 31, 2011, MMC has posted a $13.1 million loss from operations (negative 8.5% operating margin) which follows a $17.4 million operating loss in FY 2010 (negative 6.6% operating margin). In 2010, the hospital's weak financial performance was attributed to volume declines. While volumes are beginning to recover in FY 2011, major items contributing to the hospital's operating loss year to date include a $5.5 million increase in malpractice insurance reserve (including a one-time $3.8 million settlement) and a $2.6 million increase in management fees. Management expects to begin to reduce operating expenses in the second half of fiscal 2011 to limit further operating losses. Fitch believes that continuation of the poor operating performance would result in a rate covenant violation which may then trigger further negative rating action.
MMC's liquidity profile has also deteriorated from its year end results. At year end 2010, fiscal year end Dec.31, MMC had $73.5 million in unrestricted cash and investments calculating to 106.6 DCOH, a 9.5x cushion ratio and 95.3% of cash to debt ratio. At July 31, 2011, the hospital had $57.7 million of unrestricted cash and investments which calculates to 81.4 DCOH, a 7.4x cushion ratio and 76.8% of cash to debt.
MMC has a solid secondary market position in its service area compared to the market leader, Aultman Health. Over the past three years, MMC's total market share has been stable at 33% while Aultman's market share has decreased to 50% from 53% over the same period.
MMC's utilization trends show modest signs of recovery after two years of declines. For the period ending July 31, 2011, admissions, emergency room visits and outpatient visits have increased 1.9%, 3.5% and 4.5%, respectively, year over year. MMC has a challenging payor mix with 14% of revenues stemming from Medicaid. The hospital received $4.4 million in UPL, DSH and HCAPS net reimbursement in FY 2010 and is expecting approximately $4.2 million in net reimbursement for FY 2011.
MMC's debt profile is conservative and debt burden metrics are lower than the medians for Fitch's below 'BBB' category. MMC's debt to capitalization ratio is 44% versus the median of 75% and MADS as a percentage of revenues is 2.9% through July 31, 2011 versus the median of 3.5%. All of MMC's outstanding long-term debt is in fixed rate mode. The hospital does not employ swaps as part of its debt portfolio and has no plans to issue any additional long term debt over the near term. In FY 2010, MMC entered into a $13 million line of credit agreement with PNC Bank with a due date of April 2011. In FY 2011, MMC reduced the line of credit to $8 million with the due date extended to 2012. The funds were used primarily to fund certain capital expenditures and support operations.
Mercy Medical Center is a teaching hospital with 337 adult staffed beds (licensed for 476 beds) located in Canton, OH. For fiscal year ending 2010, Mercy had $263 million in total revenues. Mercy covenants to provide annual (within 120 days of the end of the fiscal year) and quarterly (within 45 days following the end of each fiscal quarter) financial information including an income statement, balance sheet, cash flow statement and utilization statistics, to be filed with the Municipal Securities Rulemaking Board, through its EMMA website.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' dated June 20, 2011;
--'Nonprofit Hospitals and Health Systems Rating Criteria', Aug. 12, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836
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