Fitch Ratings affirms the 'AA-' rating on the following North Carolina Medical Care Commission (NC) bonds issued on behalf of Novant Health, Inc. (Novant):
--$264,165,000 (Novant Health, Inc.) health care facil rev bonds ser 2010A;
--$62,205,000 (Novant Health Obligated Group) health care facil rev rfdg bonds ser 2008A;
--$67,295,000 (Novant Health Obligated Group) health care facil rev rfdg bonds ser 2008B;
--$44,950,000 (Novant Health Obligated Group) health care facil rev rfdg bonds ser 2008C;
--$250,000,000 (Novant Health Obligated Group) health care facil rev bonds ser 2006;
--$110,000,000 (Novant Health Project) hosp var-rate demand health care facils rev bonds ser 2004A;
--$25,000,000 (Novant Health Project) hosp var-rate demand health care facils rev bonds ser 2004B;
--$98,720,000 (Novant Health Project) hosp rev fixed-rate bonds ser 2003A;
--$26,155,000 (Carolina Medicorp, Inc.) hosp rev bonds ser 1996;
--$3,531,000 (Carolina Medicorp, Inc.) capital apprec ser bonds ser 1996.
In addition Fitch affirms the following taxable bonds:
--$350,000,000 Novant Health, Inc. (NC) (Novant Health, Inc.) taxable fixed-rate bonds ser 2009A;
--$100,000,000 Novant Health, Inc. (NC) (Novant Health, Inc.) taxable fixed-rate bonds ser 2009B.
Fitch Ratings has withdrawn the 'AA-' rating on the North Carolina Medical Care Commission (Novant Health Obligated Group) health care facilities revenue refunding bonds series 2007A as the bond was not sold.
Some of the above ratings are underlying ratings. The rating Outlook is Stable.
SECURITY
Bonds are unsecured obligations of the obligated group (OG), which is typical of a corporate parent model. As the system's corporate parent and sole member of its affiliates, Novant is an OG member, along with its two largest revenue-generating affiliates, Forsyth Medical Center in Winston Salem and The Presbyterian Hospital in Charlotte. OG members are jointly and severally responsible for payment of debt service. Novant has designated nine affiliates as restricted affiliates, which allows Novant to cause these restricted affiliates to provide the necessary cash to pay debt service.
KEY RATING DRIVERS
FINANCIAL RESULTS STABLE: Since Fitch's last rating action in 2010, Novant's operations have remained stable with 2.4% and 1.9% operating margins and 10.1% and 9.6% operating EBITDA margins in fiscal 2010 and 2011, respectively, which is consistent with its performance in fiscal 2009. Moving forward operations will be helped by a new Medicaid assessment program enacted by the North Carolina legislature in fiscal 2012. Novant received approximately $80 million in additional revenue in the 2012 interim period, of which $50 million was retroactive for fiscal 2011; however, the 1.9% operating margin in 2011 does not reflect the additional $50 million. Six month 2012 interim results, which includes only the $30 million of 2012 year to date payments, shows a 2.4% operating margin and 10.2% operating EBITDA margin. The Medicaid assessment program is expected to continue through 2014 and should provide Novant with a measure of operating cushion over this time.
SIZABLE CLINICAL AND FISCAL OPERATIONS: Novant is a large system with $3.5 billion in operating revenue, 13 hospitals located throughout North Carolina, South Carolina and Virginia, including large tertiary centers in Winston-Salem and Charlotte, and an extensive physician network of more than 1,100 employed physicians in 345 locations. In light of the recent trends of acquisitions and mergers that are happening across the health care sector, Fitch believes Novant's size and range of operations position it well. Novant has built the system over a number of years through acquisitions and continues to integrate the different hospitals. Recently Novant has scaled back its acquisitions, focusing more on developing affiliations and management relationships, most notably executing a 10 year shared services agreement with Memorial Health in Savannah, Georgia.
COMPETITIVE SERVICE AREAS: Most of Novant's service areas are competitive, especially Winston-Salem and Charlotte. The competitive service areas are a credit concern and intensify the pressure on Novant's operations and on the need to make investments, whether in the physical plant or in physicians, to maintain competitiveness. Novant has kept its market share stable in its service areas and in response to a recent 1% loss of market share in Charlotte, Novant put in a plan of action to regain that market share.
NEW CEO: Since Fitch's last rating action, Novant's long time CEO, Paul Wiles, who had been with Novant for 41 years, retired and the COO, Carl Armato, assumed the CEO position. A long time senior management member left Novant as well. The transition of leadership went smoothly as Novant had a period of overlap between the two executives. Fitch would expect the new CEO to make certain changes, especially given the pace of health care reform; however, Fitch believes that Novant's fundamental credit profile will not change over the next two years, which is reflected in the stable outlook.
LIGHT BUT ADEQUATE LIQUIDITY: While liquidity is light for the rating level, Novant's articulated strategy is to maintain adequate unrestricted liquidity, which includes days cash on hand of approximately 200 days, and invest unrestricted funds above that into various strategic initiatives. Fitch believes that Novant's management team is capable of managing its liquidity to this strategy and would not expect Novant to grow its balance sheet to Fitch's 'AA' medians; however, a material drop in liquidity could lead to negative rating pressure given the thinner liquidity cushion at the current rating level.
LARGE PROJECTS RAMPING UP: In the last three years Novant has built two hospitals (both opened in 2011) and undertook major renovations of its Charlotte facility, with the last part of that project to be completed by end of 2012. With these projects recently coming on line, the positive benefits of these capital investments have yet to be fully realized. Novant continues to spend on capital projects and is currently constructing a hospital in Haymarket, VA, with an estimated opening date in early 2014. The Haymarket hospital will be a 60-bed facility, including 40 medical/surgical beds, 12 obstetrical beds, eight critical care beds, four operating rooms, and a newborn nursery. Cost of construction is estimated to be $94 million.
CREDIT PROFILE
Novant is a regional integrated delivery system with 13 hospitals (2,725 licensed beds), anchored by Forsyth Medical Center in Winston-Salem (921 licensed beds) and Presbyterian Hospital in Charlotte (622 licensed beds). Novant's corporate headquarters are located in Winston-Salem, NC, with facilities located throughout central North Carolina (Greater Winston Salem market), south-central North Carolina (Greater Charlotte market) and the southeastern coastal region of North Carolina. In fiscal 2009, Novant had total operating revenues of $3.3 billion.
The 'AA-' rating is based on Novant's consistent operating performance over the last three audited years, adequate liquidity, and overall competitive position characterized by a solid market position and extensive physician network. Credit concerns are Novant's competitive service areas and its elevated leverage.
Novant finished 2011 with a 1.9% operating margin ($64.3 million in operating income) and a 9.6% operating EBITDA margin. Both the operating margin and the operating EBITDA margin trailed Fitch's 'AA' category medians of 4% and 10.2% respectively, but the results do not include an additional $45 million in funding that Novant expected to receive as part of the new North Carolina federal matching program.
Maximum annual debt service (based on $112.4 million) was 3x in 2011 and 3.8x (including only the match funds allocated for 2012) in the six-month interim period. Both figures trail the category median of 4.8x, but are consistent with prior years. The MADS figure of $112.4 million is a fairly conservative figure since it reflects three bullet maturities that currently come due in two, four, and seven years and capital leases. Novant's actual annual debt service, according to its Master Trust Indenture, is lower, $91.7 million in 2011, and Novant covered that in 2011 at 3.7x. The below median coverage levels reflects in part Novant's elevated debt burden. MADS as a percentage of revenue of 3% in the 2012 six-month interim period was above the 'AA' median of 2.5% and its debt to capitalization was 46.3% compared to a median of 33.9%. Novant's elevated debt burden is a credit concern and additional debt could pressure the rating.
Novant has $1.7 billion in long term debt. Approximately 78% of it is fixed rate and 22% is variable. Novant hedges approximately 82% of its variable rate debt with three fixed payor swaps and has good counterparty diversity using three separate counterparties. Aggregate notional value of the swaps is currently $302.7 million and the aggregate mark to market is a negative $75.3 million. Novant has no collateral posting requirements as long as it maintains a rating above an 'A-'.
The Rating Outlook is Stable. The Outlook reflects Fitch's belief that Novant's operating strength will continue to be supported by strong management practices and its successful integrated platform and that its liquidity and capital ratios should remain stable over this time. Additionally, the integration of the recent acquisitions and the opening of two new hospitals in 2011 should be accretive to Novant's financial profile over the medium term.
DISCLOSURE
Novant covenants to provide both annual and quarterly disclosure to the MSRB's EMMA system. To date, Novant's disclosure has been timely and has included consolidated financial information for the entire system, including a balance sheet, income statement, and utilization statistics but no cash flow statement or management discussion and analysis.
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.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (July 23, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418
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