AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on Gainesville Hospital District, Texas (district) dba North Texas Medical Center (NTMC) as part of its review of tax supported debt of public enterprises:
--$25.3 million general obligation (GO) refunding bonds series 2007 downgraded to 'A+' from 'AA-'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a limited ad valorem tax levied against all taxable property within the district. The district's property tax rate is limited to a maximum rate of $0.75 per $100 TAV for all purposes, provided that no more than $0.65 per $100 TAV of such tax may be levied for debt service.
KEY RATING DRIVERS
BUSINESS OPERATIONS RISK: The downgrade to 'A+' from 'AA-' reflects Fitch's increased focus on the financial risk related to the July 15, 2011 press release 'Fitch Refines Methodology for Rating Tax-Supported Debt of Public Enterprises'.
AMPLE TAX MARGIN: The district maintains substantial operating tax margin, although ad valorem taxes are limited for indigent care and debt service purposes only.
HIGH OVERALL DEBT BURDEN: Overall debt levels including overlapping taxing jurisdictions are high. Direct debt levels are modest and principal amortization is slow and extended.
TAX BASE: While healthy, taxable assessed valuation (TAV) growth has slowed considerably, reflecting the weakened housing market.
STABLE ECONOMIC INDICATORS: County economic indicators point to below average unemployment rates and above-average wealth levels.
WEAKENED FINANCIAL PROFILE: Profitability and liquidity measures declined in fiscal 2011 mainly due to investments in several strategic initiatives that should result in increased volume and revenue in the near term.
COMPETITIVE OPERATING ENVIRONMENT: The service area is competitive; however, NTMC maintains a leading market share of approximately 40%.
CREDIT PROFILE
WEAKENED FINANCIAL PERFORMANCE IN FISCAL 2011
While historical financial performance has been healthy, the trend reversed in fiscal 2011 due to higher expenses related to investments in its strategic initiatives and an increase in days in accounts receivable.
A new chief executive officer started in 2010 and has been implementing a strategic plan that includes adding service lines, which has required the recruitment of additional physicians. The medical staff has significantly increased to 73 from 40 at the beginning of the year with additional recruitments underway.
Total revenue, including property tax revenue, for the district in fiscal 2010 was $42 million. For the same year, the district posted a positive operating margin of 3.2% without tax revenue and 7.8% including property tax revenue. Unaudited results for fiscal 2011 point to a decline in total revenue and operating margins (negative 2.1% excluding property tax revenue and 3% with tax revenue). Fitch expects NTMC to realize the benefits of its strategic investments, which should result in increased volume and revenue over the near term.
Days cash on hand declined to 169 at Sept. 30, 2011 down from 193 in the prior year. The decline was due to an increase in days in accounts receivable to 62 from 41.
STABLE ECONOMY
Comprising the eastern two-thirds of Cooke County, the district is located approximately 70 miles north of Dallas and five miles south of the Texas-Oklahoma border. The district includes the city of Gainesville, located on Interstate Highway 35, which serves as the county seat and principal commercial center of the county. The county's 2010 population of nearly 38,500 increased 5.4% from the 2000 census figure. Until fiscal 2010, the county had recorded substantial annual TAV growth, spurred by the continuing northward migration from the Dallas-Fort Worth metroplex. Recent TAV growth has been more modest, reflecting the weakened housing market. Available information points to below-average mortgage delinquency and foreclosure rates and property tax collections remain solid. The county's economy is based on agribusiness, oil, and manufacturing. Particularly for a rural county, unemployment has been below average; the most recent monthly statistic of 5.6% for October 2011 was well below state (8%) and national (8.5%) averages.
MODERATE DEBT BURDEN
The district's debt relative to other Fitch-rated hospital credits remains elevated as measured by the maximum annual debt service at 3.9% of total revenues. However, the district's outstanding debt is secured by a GO pledge, payable from property tax revenue rather than operating revenues of the district. With a fiscal 2011 total tax rate of $0.0867 per $100 TAV, considerable taxing margin remains for both debt service and indigent care purposes. The district's direct debt burden on the tax base is modest (0.7% of fiscal 2010 market value); overall ratios are more moderate reflecting debt issuances by the city of Gainesville as well as eight area school districts.
Principal amortization is about 39% in 10 years, with all bonds maturing by 2032. While below average for GO credits, the pace of amortization is somewhat typical for healthcare facility financings. Currently, the district's near-term capital plans include a wellness center and moving a rural health clinic that it purchased in July 2010. These capital needs may be funded by additional debt although management stated that the debt would not be tax supported.
DISTRICT AND FACILITIES
The district's operations comprise one acute care facility (the North Texas Medical Center with 60 licensed beds) and five medical/professional buildings, which include a home health services center. The service area is predominately Cooke County, with additional patients coming from eastern Montague County, western Grayson County, northern Denton County, and southern Love County in Oklahoma. NTMC is governed by a nine-member board elected by the voters of the district serving staggered three-year terms.
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.
In addition to the sources of information identified in Fitch's 'Tax Supported Rating Criteria', this action was informed by information from Credit Scope and Texas Municipal Advisory Council.
Applicable Criteria and Related Research:
--'Tax Supported Rating Criteria', dated Aug. 15, 2011;
--'U.S. Local Government Tax Supported Rating Criteria', dated Aug. 15, 2011.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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