Fitch Ratings has affirmed the 'BBB-' rating on the following Industrial Development Authority of Saline County, Missouri bonds, issued on behalf of John Fitzgibbon Memorial Hospital (JFMH):
--$11.9 million hospital refunding revenue bonds, series 2010;
--$8.9 million hospital revenue bonds, series 2005.
The Rating Outlook is Stable.
SECURITY
A pledge on gross revenues, mortgage on certain hospital and nursing home property, and fully-funded debt service reserve provide security for the bonds.
KEY RATING DRIVERS
STEADY CASH FLOW AND COVERAGE: For the past three fiscal years, JFMH has consistently produced profitability ahead of Fitch's 'BBB' category medians, supported by stable utilization metrics and good expense management. As a result, debt service coverage was healthy at 3.5x by EBITDA in fiscal 2012 (April 30 year end) against Fitch's 'BBB' category median of 2.8x. Further, cash flow has enabled steady liquidity improvement to $20.9 million at July 31, 2012 equating to 171 days of cash on hand and 101.3% cash to debt.
LEADING BUT DECLINING MARKET POSITION: JFMH maintained a leading inpatient market position of 43.3% in Saline County in 2011; however, this has dropped from 50.8% in 2009 despite inpatient admission growth over the same time frame. Boone Hospital Center (BHC; revenue bonds rated 'A' by Fitch) garnered 22.1% inpatient share in 2011, with which JFMH has had a strong relationship via a management agreement since 1998. BHC is managed by CH Allied Services, a subsidiary of BJC Healthcare. Still, JFMH operates within an economically challenged service area, as indicated by its high bad debt (14.8% of total operating revenue) level in fiscal 2012.
MODERATE DEBT BURDEN: Total debt was $20.7 million at July 31, 2012, equating to 40.5% of capitalization and 3.4x EBITDA, both favorable to Fitch's 'BBB' category medians of 49.1% and 4.2x, respectively. JFMH's capital structure is conservative with 100% fixed rate debt.
UNFAVORABLE PAYOR MIX: JFMH's payor mix presents some credit concern. Over 60% of JFMH's gross revenues (47% of net revenue) are from Medicare and Medicaid, and include favorable supplemental payments which are at risk from changes at a state and federal level. JMFH currently receives supplemental Medicare funding as a Sole Community Hospital (SCH) and also receives Medicaid disproportionate share hospital (DSH) monies from Missouri.
REVENUE BASE A LIMITING FACTOR: JFMH's small revenue base of $59.9 million in fiscal 2012 makes the organization more susceptible to operating volatility, such as medical staff recruitment/retention, payor mix changes, and utilization shifts. The rating affirmation incorporates this risk against a financial profile which is favorable for the rating level.
CREDIT PROFILE
The affirmation at 'BBB-' is supported by JFMH's continued solid cash flow and resulting balance sheet growth. Debt metrics are favorable due to the manageable debt burden. JFMH's operating EBITDA margin was 9.8% in fiscal 2012, down from 11.2% in fiscal 2011 but still ahead of Fitch's 'BBB' category median of 8.3% and produced 3.3x coverage of maximum annual debt service (MADS). Calculation of debt service coverage per JFMH's MTI was 3.46x in fiscal 2012.
Fitch believes JFMH benefits from its leading market position and relationship with BHC, which helps to support steady revenue growth and expense management via better service and supply contracting. Since fiscal 2008, JFMH has successfully managed its total expenses to remain in line with its revenues, which have grown an average 5.7% annually over five fiscal years.
JFMH's capital needs are manageable at $3.5 million in 2013 and under $2 million in 2014, funded via cash flow. JFMH may also utilize a direct placement for a $3.5 million office building expansion in fiscal 2013, and Fitch believes there is capacity at the current rating for this additional debt. The project will provide needed office space for physicians needing direct access to hospital-based services, including surgery and obstetrics.
Fitch notes that JFMH's small size and rural location puts it at higher risk of operating volatility. Physician time off, vacancies and market changes can have a volatile impact on its utilization, as demonstrated by a 13% increase in admissions, a 7.3% drop in births and an 8% drop in total surgeries in fiscal 2011. The rating incorporates these risks against JFMH's track record of successful physician recruitment/retention and revenue growth.
Of additional concern is JFMH's payor mix, which is heavily government pay based making it susceptible to changes at the state and federal level. JFMH has thus far benefitted from better Medicare and Medicaid reimbursement due to its status as a rural SCH provider, equating to approximately $725,000 in fiscal 2012. However, the stability of these additional revenue sources is uncertain due to the impact that state cost control measures and federal budget changes might have on Medicaid and Medicare reimbursement.
The Stable Outlook is supported by Fitch's expectation that JFMH will continue to benefit from its market position and alignment with BHC, producing consistent operating cash flow which support its capital needs and allow for balance sheet growth. JFMH is budgeting for $2.1 million in operating income in fiscal 2013, which is reasonable against current performance. Operating cash flow ahead of budget and prior year levels, coupled with further liquidity growth could result in positive rating pressure.
JFMH is a 60-licensed-bed hospital located in Saline County, Missouri, approximately 80 miles east of Kansas City. Operations also include a 99-bed skilled nursing facility and several rural health clinics. Total revenues in fiscal 2012 were $59.9 million.
JFMH covenants to provide audited annual statements within 180 days of each fiscal year end and quarterly statements within 60 days of each quarter end to the Municipal Securities Rulemaking Board's EMMA system. Quarterly disclosure includes a balance sheet, income statement, cash flow statement, and utilization data.
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', dated June 12, 2012.
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated 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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