CHICAGO--()--Fitch Ratings has assigned an 'A' rating to the following bonds expected to be issued by the North Carolina Medical Care Commission on behalf of Southeastern Regional Medical Center (SRMC):
--$38.3 million series 2012 health system revenue bonds.
In addition, Fitch has affirmed the 'A' rating on the following bonds issued by the North Carolina Medical Care Commission on behalf of SRMC:
--$15 million series 1999 hospital revenue bonds;
--$32.7 million series 2002 hospital revenue bonds.
The Rating Outlook is Stable.
The 2012 bonds are expected to be issued as fixed rate bonds. Bond proceeds will be used to refund SRMC's outstanding series 1999 and 2002 bonds and to pay costs of issuance. The bonds are expected to price the week of Sept. 27 via negotiation.
The Rating Outlook is Stable.
KEY RATING DRIVERS:
--STRONG MARKET SHARE: SRMC has maintained a consistently strong market share which increased to 63.3% in its primary service area (PSA) which accounts for over 85% of discharges.
--SOLID LIQUIDITY: Unrestricted liquidity metrics continue to strengthen and provide good cushion for payment of debt service with 252.3% cash to debt and 36x cushion ratio at June 30, 2012.
--MANAGEABLE DEBT BURDEN: SRMC's debt burden is extremely manageable with pro forma maximum annual debt service (MADS) equal to 1.3% of revenues in the nine-month interim period ending June 30, 2012 (the interim period) allowing for solid pro forma MADS coverage of 5.8x EBITDA.
--LIGHT OPERATING PROFITABILITY: Although management's cost control and revenue enhancement initiatives have appeared to produce more consistent operating results, operating profitability remains light for the rating category with an operating margin of 2.1% in fiscal 2011 relative to Fitch's 'A' category median of 2.8%.
Bond payments are secured by a pledge of the obligated group's accounts receivable and a negative pledge of all other assets.
The 'A' rating is supported by SRMC's strong market position, solid liquidity metrics and manageable debt burden.
SRMC's market share has been consistently strong in its primary service area (PSA) of Robeson County. PSA market share has increased to 63.3% in fiscal 2011 from 61.6% in fiscal 2009. The PSA accounts for over 85% of SRMC's discharges. No other provider has over 11% market share in the PSA. SRMC's status as an essential services provider in its PSA enhances SRMC's overall operating stability and credit profile.
Unrestricted liquidity metrics continue to strengthen and provides ample cushion for payment of debt service. Unrestricted cash and investments increased 13.9% since Sept. 30, 2011 to $164 million at June 30, 2012. This equates to a strong 239.5 days cash on hand, a pro forma cushion ratio of 36x times and cash to debt of 252.3% relative to Fitch's 'A' category medians of 191 days, 16.3x and 116.4%, respectively.
SRMC's low debt burden allows for solid pro forma MADS coverage. The system's low leverage and debt burden is highlighted by its 24.5% debt to capitalization and pro forma MADS equal to 1.3% of revenues in the interim period. The low debt burden translates into solid pro forma MADS coverage equal to 5.8x EBITDA and 5.4x operating EBITDA relative to Fitch's 'A' category medians of 4.1x and 3.3x, respectively. Pro forma MADS is expected to decrease to $4.5 million from $5.1 million and was provided by the underwriter.
Post series 2012 issuance, SRMC's debt portfolio will be comprised of approximately 66% fixed rate debt and 34% variable rate. SRMC is not counterparty to any swap agreements. Total debt outstanding is expected to decrease to approximately $58.3 million from $67.7 million due to the expected use of existing debt service reserve funds to retire a portion of the refunded bonds and the use of a premium bond structure. The series 2012 bonds are not expected to be supported by a debt service reserve fund. Pro forma long-term debt to capitalization is expected to equal approximately 21% relative to Fitch's 'A' category median of 40.7%.
Operating profitability has stabilized in recent years reflecting management's cost control and revenue enhancement initiatives. After a period of variability, operating margin has averaged 2.1% since fiscal 2008 and equaled 2.1% in fiscal 2011 and 2.3% in the interim period. Despite the improvement in consistency, profitability levels remain light for the 'A' category.
Operating profitability should be bolstered going forward by a new Medicaid assessment program enacted by the North Carolina legislature in fiscal 2012. SRMC received approximately $24 million in additional revenue in the interim period, of which $12 million was retroactive for fiscal 2011. The additional Medicaid assessment program revenue is expected to average $12 million per year. The new program does not have a termination date and will remain in place indefinitely.
Capital spending is expected to increase in the near term from current levels due to enactment of SRMC's Master Facility Plan. The plan includes the construction of a stand-alone ambulatory surgery center (ASC) which is expected to be a joint venture structure with surgeons to increase physician alignment. Physicians could own up to 49% of the facility. The certificate of need was granted in early 2012 and SRMC expects to break ground in fall 2012 with an early 2014 expected opening date. No debt is expected to be issued to fund the construction.
Approximately $20 million of unrestricted cash and investments may be used to fund construction of the building in which the ASC will reside. Reflecting the cash outlay, SRMC's adjusted liquidity metrics remain strong relative to Fitch's 'A' category medians.
Credit concerns include SRMC's high exposure to government payors. With 69.1% of gross revenues derived from Medicare and Medicaid in fiscal 2011, SRMC is vulnerable to state and federal budget cuts. In anticipation of potential decreases in Medicare reimbursement, SRMC prioritized cutting losses on Medicare services. SRMC made a profit on Medicare for the first time in fiscal 2010 due to increased operating efficiencies, including a reduction in force in January 2010. Continued expense reductions are expected to be achieved through flex staffing, productivity management and LEAN operating principles.
The Stable Rating Outlook reflects Fitch's belief that SRMC will maintain profitability and liquidity levels as well as its position as the region's essential services provider.
Southeastern Regional Medical Center is a 337-bed acute care hospital located in Lumberton, NC. Operating revenues equaled $297.7 million in fiscal 2011. SRMC covenants to provide annual disclosure within 120 days of the end of each fiscal year and quarterly disclosure within 45 days of the end of each fiscal quarter. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.
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 the U.S. Revenue-Supported Rating Criteria information was received from the underwriter.
Applicable Criteria and Related Research:
-- Rating Criteria', June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', July 23, 2012.
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria