NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following North Carolina Medical Care Commission bonds expected to be issued on behalf of FirstHealth of the Carolinas (FirstHealth):
--$45.3 million fixed-rate revenue refunding bonds, series 2012A.
In addition, Fitch affirms the 'AA' rating on the following revenue bonds issued by the North Carolina Medical Care Commission on behalf of FirstHealth:
--$29 million variable-rate demand bonds, series 2002;
--$42.7 million fixed-rate revenue refunding bonds, series 2008A;
--$45.5 million fixed-rate revenue refunding bonds, series 2009A;
--$47.6 million fixed-rate revenue refunding bonds, series 2009C.
The Rating Outlook is Stable.
The 2012A bonds are expected to be issued as fixed-rate bonds. Bond proceeds will be used to currently refund FirstHealth's series 2009A bonds and to pay costs of issuance. The bonds are expected to price the week of April 16.
SECURITY
Bonds are currently secured by a security interest in the Restricted Group's accounts receivable so long as the series 2009A bonds are outstanding. Once the series 2009A bonds are refunded by the series 2012A bonds, the outstanding debt will be general unsecured obligations of FirstHealth.
KEY RATING DRIVERS
STRONG MARKET POSITION: FirstHealth has consistently maintained a dominant market share in its primary service area and faces limited competition.
AMPLE LIQUIDITY: Liquidity metrics have consistently exceeded 'AA' category medians with days cash on hand of 314 days and a cushion ratio of 27.6 times (x) compared to the 'AA' category medians of 240 days and 22.4x, respectively.
WEAKENED OPERATING PROFITABILITY: One of Fitch's primary credit concerns is the deterioration in FirstHealth's operating profitability with a decline from a 10.7% operating EBITDA margin in fiscal 2007 to 9.2% in fiscal 2011.
SMALL REVENUE BASE RELATIVE TO PEERS: Due to FirstHealth's revenue size and limited geographic diversity, FirstHealth's rating will be more sensitive to changes in financial performance relative to its larger, more geographically diverse 'AA' peer group.
WHAT COULD TRIGGER A RATING ACTION
FirstHealth's profitability measures have been pressured by physician turnover in fiscal 2011 and costs related to the opening of the new Reid Heart Center in January 2011. The physicians were subsequently replaced and the heart center is expected to reach full operations in fiscal 2013. Downward rating pressure is likely to occur if operating profitability fails to improve once the heart center reaches full operations in fiscal 2013.
CREDIT PROFILE
The key rating drivers supporting the 'AA' rating remain largely unchanged since Fitch's last review in October 2011. The rating reflects the benefit of FirstHealth's dominant market share in its primary service area combined with strong liquidity metrics and historical profitability consistent with category medians. Primary credit concerns remain FirstHealth's relatively small size compared to its 'AA' category peers and the recent compression in operating profitability due to physician turnover and the opening of the Reid Heart Center in January 2011.
A primary credit strength is FirstHealth's dominant market share position which enhances operating stability. In 2011, FirstHealth reported a 61% market share in its primary service area and approximately 89% in Moore County. The primary service area accounts for approximately 78% of inpatient admissions, excluding newborns. Moreover, the nearest competing tertiary hospitals are over 40 miles away.
FirstHealth's liquidity position continues to be a credit strength and provides a strong cushion for timely payment of debt service. Unrestricted cash and investments increased 14% since fiscal 2009 to $385 million as of Jan. 31, 2012. This equates to 314 days cash on hand, 27.6x cushion ratio and 167% cash to debt, exceeding Fitch's 'AA' category medians of 240 days cash, 22.4x and 159%, respectively.
Operating profitability has slowly deteriorated over time and the fiscal 2011 operating margin budget was not met. Operating EBITDA margin decreased to 9.2% in fiscal 2011 from 10.5% in fiscal 2010 relative to Fitch's 'AA' category median of 10.6%. Operating performance declined due to increased salaries expense related to the opening of the Reid Heart Center and the departure of four surgeons and one specialist. The Heart Center is expected to reach full operations in fiscal 2013 and is expected to be accretive to profitability at that point. The physicians were replaced and surgical volumes are expected to rebound in fiscal 2012.
Maximum annual debt service (MADS) coverage has been light relative to 'AA' category peers at 3.4x operating EBITDA in fiscal 2011. Operating profitability improved marginally in the four-month interim period ending Jan 31, 2012 (the interim period) with operating EBITDA margin equal to 9.6% and MADS coverage of 3.6x operating EBITDA. Management projects fiscal 2012 operating EBITDA margin and MADS coverage to equal 9.7% and 3.9x, respectively, relative to the original budget of 9.5% and 3.8x.
Upon issuance of the series 2012A bonds, total debt outstanding will equal $235 million and will be 40% underlying fixed rate and 60% underlying variable rate. With a notional amount of $72 million of fixed payor swaps, FirstHealth's variable-rate exposure is reduced to 29%. Fitch believes FirstHealth has limited debt capacity at the current rating level.
Future capital spending plans include the construction of a new hospital in Hoke County. However, the certificate of need (CON) is currently under appeal. Excluding the new hospital project, capital expenditures are forecasted to equal approximately $28 million per year. If the CON is approved, the new hospital project would add between $13 million and $25 million in capital expenditures per year during the construction period.
An additional credit concern is FirstHealth's vulnerability to government budget cuts due to the system's high exposure to government payors. Over 67% of gross revenues are derived from Medicare and Medicaid. This vulnerability is highlighted by North Carolina's biennial budget which included a 2% Medicaid rate cut. A potential Medicaid assessment program would provide FirstHealth an annual net benefit of $8 million, which would be viewed positively. This program is awaiting final approval and would be retroactive to fiscal 2011.
FirstHealth experienced turnover in its c-suite in fiscal 2011. The chief executive officer retired at the end of December 2011. The transition to the new CEO, who has over 20 years of executive-level healthcare experience, has been reported to be smooth. Additionally, a new chief medical officer was promoted from within FirstHealth while a new president of FirstHealth Physicians Group was appointed. Existing management is currently fulfilling vacant chief operating officer and chief nursing officer roles on an interim basis.
Relative to its 'AA' peer group, FirstHealth's small revenue base exposes the organization to greater volatility in operating performance as evidenced in 2011, when physician departures and the opening of the heart center had a negative impact on profitability. As a result, FirstHealth's rating will be more sensitive to changes in financial performance relative to its larger, more geographically diverse 'AA' peer group.
The Stable Outlook is based upon Fitch's expectation that liquidity metrics remain strong while coverage and operating profitability will improve as the Reid Heart Center achieves full operations in fiscal 2013. Given FirstHealth's small revenue base, current profitability levels are inconsistent with its rating level, and an improvement in profitability is imperative to maintaining the rating. Downward rating pressure is likely to occur if improvements are not achieved.
FirstHealth is a three-hospital healthcare system headquartered in Pinehurst, North Carolina, with 582 licensed beds and total revenues of $507 million in fiscal 2011. FirstHealth posts quarterly and annual disclosure to the Municipal Securities Rulemaking Board's EMMA website.
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 20, 2011);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (Aug. 12, 2011).
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
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