CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on the following Cape Girardeau County Industrial Development Authority bonds issued on behalf of Southeast Missouri Hospital Association (SEMO, d/b/a SoutheastHEALTH).
--$7.9 million hospital revenue bonds, series 1993;
--$6.6 million hospital revenue bonds, series 2002;
--$95.9 million hospital revenue bonds, series 2007.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of the unrestricted receivables of Southeast Missouri Hospital Association, with additional security provided by a debt service reserve fund.
KEY RATING DRIVERS
EVIDENCE OF SUSTAINED IMPROVEMENTS: Despite a marked decline in operating performance in fiscal 2010 and fiscal 2011 (unaudited; Dec. 31 year end), SEMO's core operations have rebounded with demonstrated improvement through the five months ended May 31, 2012 (interim period). SEMO's operating EBITDA margin was 10.2% compared to 7.1% in fiscal 2011 and 7.9% in fiscal 2010.
MANAGEABLE DEBT LEVEL: SEMO has consistently maintained debt service coverage levels in line with the rating category and has no plans for additional debt. Coverage of maximum annual debt service (MADS) by operating EBITDA was 4.4x through the interim period, ahead of 2.9x in unaudited fiscal 2011 and Fitch's 'BBB' category median of 2.4x. MADS as a percent of revenues and debt to capitalization were both moderate at 2.3% and 36%, respectively, at May 2012.
MODERATION IN CAPITAL SPEND: Following several years of robust capital spending, SEMO is planning for $15-16 million in annual expenditures for the next few years. Against budgeted operating EBITDA of $37 million in 2012, this should provide for modest balance sheet growth.
LIQUIDITY LIGHT FOR CATEGORY: SEMO's unrestricted liquidity equaled $73.4 million at May 31, 2012, equating to 95.8 days of cash on hand (DCOH) and 64.8% cash to debt. This compares unfavorably to Fitch's 'BBB' category medians of 128.6 DCOH and 62.2% cash to debt. Growth has been hampered since 2009 by planned capital spending and asset devaluation, but Fitch expects steady cash flow and reduced capital spending to improve these metrics going forward.
WHAT COULD TRIGGER A RATING ACTION
FAILURE TO MAINTAIN IMPROVED OPERATING PERFORMANCE: Following two years of weaker operating performance, SEMO must sustain the improved cash flow as demonstrated through May 2012 in order to preserve the rating. Failure to sustain this trend and build liquidity would likely result in downward rating pressure.
CREDIT PROFILE
The 'BBB+' rating is supported by a rebound in SEMO's operating performance in interim 2012, which has been achieved by a new leadership team who joined in June 2011. The new CEO and newly-appointed CFO have identified opportunities to operate more efficiently and have been selective in acquisitions and physician alignment for key service lines. Through May 2012, SEMO is on track to meet its 2012 budget for $10.5 million in operating income (2.9% margin).
SEMO has historically had strong operating performance with operating EBITDA margins that averaged an annual 12.5% for fiscal 2007-2009, but dropped in fiscal 2010 and 2011. SEMO's 2011 audit is not available yet due to discussions with its auditor regarding the classification of expected disproportionate share funds (DSH) from a settlement.
SEMO received $10.7 million of Medicaid DSH funds in 2011. In early 2012, SEMO was notified that they would receive an additional $14 million in DSH payments due to a difference in its estimated earned versus actual earned DSH moneys, which resulted in underpayment. To date, SEMO has received two payments of $2.5 million each, the first of which is reflected in May interim performance.
SEMO recently completed a phase of significant capital projects, including a new cancer center (opened March 2011) and information technology investments. With limited needs going forward, SEMO should be able to replenish its balance sheet with consistent cash flow. No additional debt is planned. Total debt was $113.3 million at May 2012, which was all fixed rate with no swaps.
Credit concerns include light liquidity for the rating, a competitive service area, and a challenging payor mix. SEMO's persistently light liquidity is due in large part to the planned capital spending, as well as strategic growth via acquisitions and approximately $6 million in asset devaluation via unrealized investment losses. Fitch expects SEMO to improve its liquidity over the near to medium term.
The primary service area includes Cape Girardeau and the three surrounding counties, in which inpatient and outpatient market share is largely split between St. Francis Medical Center (SFMC, revs rated 'AA-/Stable'). Service area socio-economic indicators are mixed and reflected in SEMO's relatively high level of bad debt and Medicaid.
The Stable Outlook is supported by Fitch's expectation that SEMO will continue to produce improved operating cash flow, achieving its 2012 budgeted 2.9% operating margin and 10.4% operating EBITDA margin. Absent significant capital needs, this level of cash flow should support balance sheet improvement. Failure to continue to produce improving cash flow and build liquidity would likely pressure the rating.
Located in Cape Girardeau, MO (approximately 100 miles south of St. Louis), SEMO is an acute care hospital with 221 staffed beds. The SoutheastHEALTH (SEMO) system also includes home health, hospice, a new cancer center, and various other ambulatory sites and services. In unaudited fiscal 2011, SEMO reported total revenues of approximately $330 million.
SEMO covenants to disclose annual audited financial statements within 120 days after the end of the fiscal year and quarterly financial and operating information within 90 days at the end of each quarter. SEMO disseminates this information including a balance sheet, income statement, cash flow statement and utilization statistics through the Municipal Securities Rulemaking Board EMMA website. SEMO expects to file its 2011 annual report by June 30, 2012.
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.
This action was informed by the sources of information identified in Fitch's 'Revenue-Supported Rating Criteria'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.
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=648836
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