NEW YORK--()--Fitch Ratings has affirmed the 'A+' rating on Summit Health, PA's (SH) outstanding debt listed below:
-- $124 million Franklin County Industrial Development Authority revenue bonds, series 2010.
The Rating Outlook is Stable.
SECURITY: The bonds are secured by a pledge of gross revenues and debt service reserve fund.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: SH's financial profile is highlighted by its robust balance sheet metrics, solid profitability, and satisfactory maximum annual debt service (MADS) coverage indicators.
DOMINANT MARKET POSITION: Fitch views SH's dominant market position of 74.2% in its primary service area (PSA) as a primary credit strength. SH's closest competitor is Meritus Health (MH; rated 'BBB'; Stable Outlook by Fitch), which had a 6% share in 2011.
FAVORABLE PATIENT TRENDS: Over the past two years overall utilization patterns have trended positively. Specifically, inpatient admissions, new-born births, outpatient surgeries, and emergency department (ED) visits nearly met or exceeded prior year levels despite significant increases in observation stays.
SUCCESSFUL PHYSICIAN ENGAGEMENT: SH's approach to engaging physicians, which includes employment, joint-venturing, and use of independent contracts, has been successful in sustaining the organization's market presence and supporting profitability growth.
MANAGEABLE CAPITAL PLANS: With major facility construction nearly complete, SH has no large capital needs over the medium term. Chambersburg Hospital's (CH) new four-level addition is expected to open in December 2012 on time and on budget.
AFFIRMATION OF 'A+' RATING
The 'A+' rating is supported by SH's strong financial profile, dominant market position with limited competition, good physician engagement strategy that has supported volume growth, and manageable capital plans.
In fiscal 2011 (June 30, 2011; audited), SH generated $23.2 million in income, which is the highest over the past four fiscal years - translating into a 5.8% operating margin and 9.7% operating EBTIDA margin. These metrics compared favorably against Fitch's 'A' category medians of 2.6% and 9.4%, respectively. Through the nine-month interim period (March 31, 2012; unaudited), the system earned $17 million in income (5.2% operating margin), which is already ahead of management's budgeted year-end target income of approximately $12.7 million.
Solid operations have helped support good cash growth and satisfactory debt service coverage. Through March 2012, SH had $292.6 million of unrestricted cash and investments, which is improved from 2008's $200.8 million absolute total. Further, MADS coverage was 3.9x by EBITDA through the interim period and has averaged 3.6x over the past four fiscal years, which is consistent with the 'A' category median of 3.7x.
The system operates two hospitals that serve patients in Franklin, Fulton, Adams, and Cumberland Counties in PA and Washington County in MD; SH's nearest competitors are Fulton County Medical Center (FCMC; a critical access hospital) and MH. Overall, Fitch views SH's competitive position as favorable, as illustrated by the system's dominant market share in the PSA.
Volume trends have been positive in fiscal 2011 and through the March 2012 interim period as management continues to explore relationships and create positive alignment with physicians in the service area. Specifically, inpatient admissions increased to 15,417 in 2011 from 15,383 in 2010, while observation stays increased to 4,517 from 4,189 over the same period. In addition, outpatient volumes generally increased from prior year levels as patient utilization patterns continue to shift to an outpatient setting of care.
Fitch's main credit concern centers around SH's increasing mix of governmental payors (Medicare and Medicaid) which has grown over the past four fiscal years. Specifically, SH's Medicaid payor base has increased to 11.8% of gross revenues, which is relatively high, through March 2012 from 9.5% in 2008. Fitch recognizes that the risk of having an enhanced level of governmental payors can expose the organization to reimbursement pressure at the state and federal level.
The Stable Rating Outlook reflects Fitch's expectations that SH will continue to generate solid operating profitability and maintain substantial balance sheet cushion. Additionally, Fitch expects SH's construction project to be complete within its current scope on time and on budget.
DEBT PROFILE & DISCLOSURE
Approximately 81% of SH's debt is fixed-rate and 19% is variable-rate. SH has an outstanding bank loan with Susquehanna Bank (which Fitch does not rate) for $30 million that matures in 2020. SH may decide to refund the loan and amortize the bullet maturity closer to the maturation date. SH also has an outstanding swap with Royal Bank of Canada (rated 'AA/F1+'; Stable Outlook) that had a negative mark-to-market valuation of $23.3 million as of March 30, 2012. SH is currently posting approximately $14.6 million in collateral related to the swap. Overall, Fitch views the organization's debt profile as relatively conservative as its composition is primarily fixed-rate.
SH covenants to submit annual and quarterly financial and utilization information to the MSRB's EMMA system. Management was candid and timely in its responses to Fitch during the credit review process.
Located in south-central Pennsylvania, SH is anchored by two acute care facilities, CH and Waynesboro Hospital, which have a combined total of 303 licensed beds. In fiscal 2011, SH had total operating revenues of $397.1 million.
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.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria