NEW YORK--()--Fitch Ratings has affirmed the 'A-' rating on approximately $33 million of West Orange Healthcare District revenue bonds series 2001A. Fitch does not rate the series 2009 bonds. Total outstanding debt is approximately $57 million.
The Rating Outlook is Stable.
RATING RATIONALE:
--West Orange Healthcare District (dba Health
Central) continues to maintain a strong liquidity position, holding
approximately $100 million in unrestricted cash and investments at July
31, 2010. These funds equate to 263 days cash on hand, a 16.8 times (x)
cushion ratio, and 177% cash to debt, all of which are well in excess of
the 'A' category medians of 184 days, 14.4x and 105.5%. However,
liquidity growth has been at the expense of capital spending, which
Fitch views negatively.
--Operating performance has improved over
the past two fiscal years. In fiscal 2009 (ended Sept. 30), Health
Central posted a 2% operating margin and 8.1% operating EBITDA margin,
up from 0.1% and 6.9%, respectively, in the prior year. Through the 10
months ended July 31, 2010 (interim period), profitability continued to
improve, moving to a 2.9% operating margin and 8.9% operating EBITDA
margin, which are just below the respective 'A' category medians of 3.0%
and 10.0%.
--The Orlando market is extremely competitive, with two
large systems - Florida Hospital (owned by Adventist Health System
Sunbelt, rated 'AA-' by Fitch) and Orlando Health (rated 'A') -
controlling the majority of the market share. Within Health Central's
target service area, it reported a 31.8% market share in fiscal 2009,
which represents a slight decline over the past few years.
--Health
Central's debt burden is manageable, with maximum annual debt service
(MADS) totaling 3.3% of revenues and debt to capitalization a low 27.3%
at July 31, 2010. However, the debt profile is fairly aggressive with
47% of debt in variable rate demand bonds (VRDBs), which exposes Health
Central to interest rate and renewal risk. Put risk is offset by the
ample liquidity position. Debt service coverage by operating EBITDA has
been somewhat light relative to the 'A' category median but has trended
upward in recent years to 2.7x through the interim period.
--Average
age of plant has risen noticeably since fiscal 2005, increasing from 7.7
years to 11.3 years in fiscal 2009. This has been driven by relatively
light capital spending, which has averaged approximately 89% of
depreciation expense over this period.
--Bad debt remained elevated
at 18.9% of revenues in fiscal 2009 and 16.2% through the interim period.
KEY RATING DRIVERS:
--Sustaining the current level of financial
operating performance, coupled with the maintenance of its liquidity
position would be viewed favorably.
--Successful affiliation with
one of the larger players in the market could lead to positive rating
pressure, depending on the structure and benefits derived from the
affiliation.
SECURITY:
Debt payments for the series 2001A bonds are secured by a
pledge of operating revenues and a debt service reserve fund.
CREDIT SUMMARY:
The affirmation reflects Health Central's strong
liquidity position, recently improved operating performance, and
manageable debt burden. Unrestricted cash and investments have grown
from approximately $82 million at fiscal year end 2008 to $100.2 million
at July 31, 2010. As a result, days cash on hand has improved by nearly
39 days to 263, and the cushion ratio and cash to debt have increased to
16.8x from 13.7x, and 176.7% from 132.2%, respectively. Liquidity growth
has been generated through a combination of decent cash flow generation,
investment gains, and light capital spending.
In fiscal 2009, Health Central posted a 2% operating margin ($3.7 million in operating income) and 8.1% operating EBITDA margin, which was improved from the prior year's 0.1% ($172,000 in operating income) and 6.9%, respectively. Through the 10-month interim period, the operating and operating EBITDA margins improved to 2.9% ($4.4 million in operating income) and 8.9%, respectively. The recent improvement is attributable to expense controls, particularly labor, which has remained flat for the past three fiscal years, and improvements in its supply costs as a result of its purchasing alliance with Orlando Health.
Also contributing to the improvement were increasing outpatient volumes that offset inpatient declines, contributing to net patient revenue growth of 7.3%. In the interim period, inpatient volumes were up 0.6% and emergency department visits continued to show growth, although births and outpatient surgeries declined over the prior year. While Fitch expects Health Central to maintain its current level of profitability in the near term, expectations for future reimbursement pressure for the industry - lower Medicare and Medicaid rates, as well as the limited ability to secure favorable rates from commercial payors due to its market position - will create a challenging operating environment that could ultimately strain operating profitability.
Health Central's debt burden is manageable with MADS totaling 3.3% of revenues and debt to capitalization a low 29.4% compared to the respective 'A' category medians of 3.0% and 42.1%. However, the debt profile is fairly aggressive with approximately 47% of the outstanding debt in VRDBs. Health Central has benefited from the low interest rate environment with a reduction in interest expense over the last two years; however, interest rate risk remains a concern. The VRDBs are secured by a letter of credit (LOC) from Suntrust Bank and a LOC wrap from Federal Home Loan Bank of Atlanta, both of which expire on Nov. 2, 2012. Management expects to secure an additional year commitment in the near future, which would extend the LOCs through September 2013. Health Central has more than sufficient liquidity to cover any draws under the LOC if there are any unremarketed puts, with unrestricted cash and investments at 3.7x demand debt. Debt service coverage by EBITDA is generally consistent with 'A' category medians. Coverage by operating EBITDA, at 2.7x for the interim period, is slightly below the 3.3x category median.
Primary credit concerns include the competitive service area, rising average age of plant, and high bad debt expense. The Orlando market is dominated by two large systems, Florida Health, which controls 1,747 beds across eight hospitals, and Orlando Health, which operates 1,182 beds across seven hospitals, out of a total of 4,229 beds in the Orlando market. Combined, these two systems held approximately 80% of the Orlando market's inpatient discharges in 2009. Health Central reported a 31.8% target service area market share (comprised of the five surrounding zip codes) in fiscal 2009, down slightly from the prior year's 32.7% share. Health Central has or will open several new service lines within the next few months, which should drive additional volume to the facility. Given its market share position, Health Central does not have much leverage with managed care payors. As a result, Health Central is exploring options to affiliate with a larger system in the market, which would likely be viewed positively by Fitch.
Health Central's capital spending has averaged about 89% of its depreciation expense over the past five fiscal years, which has led to a sizable increase in the average age of plant. At 11.3 years, the average age of plant is unfavorable to Fitch's 'A' category median of 10 years. Capital spending in fiscal 2011 is projected to be equal to depreciation expense. Fitch views the lack of capital spending unfavorably especially in light of the competitive marketplace. Health Central is in the process of developing a cancer center which is not included in the fiscal 2011 budget and is also contemplating additional capital plans that will likely increase overall spending.
The Stable Rating Outlook is based on Fitch's expectation that Health Central will continue to post stable financial results and maintain a strong liquidity position, which compensates for its market position. Health Central is discussing a possible affiliation or merger with several regional systems, which could positively impact the rating depending on the structure and potential benefits that would flow to it.
Located in Ocoee, Florida (11 miles west of downtown Orlando), Health Central is a community healthcare provider operating a 171-staffed-bed acute care hospital, a 228-bed nursing home, and other related entities. Total operating revenue in fiscal 2009 was $182.2 million. Health Central covenants to provide bondholders with annual audited financial statements. Quarterly disclosure has been provided to EMMA.
Additional information is available at www.fitchratings.com.
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from HealthLeaders InterStudy.
Related Research:
'Revenue-Supported Rating Criteria', dated Aug.
16, 2010;
'Nonprofit Hospitals and Health Systems Rating Criteria',
dated Dec. 29, 2009.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606
Nonprofit
Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
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