NEW YORK--()--Fitch Ratings has downgraded the rating on the following debt issued by the County of Dickinson, State of Michigan, on behalf of Dickinson County Healthcare System (DCHS):
--$24.1 million series 1999 to 'BB-' from 'BB+'.
The Rating Outlook is Stable.
The bonds are secured by a pledge of net revenues, certain equipment, investment income, and bond funds under the indenture agreement. DCHS has a debt service coverage covenant of 1.25 times (x) and a debt service reserve fund.
KEY RATING DRIVERS
SIGNIFICANTLY WEAKENED FINANCIAL PROFILE: The rating downgrade to 'BB-' from 'BB+' was driven by DCHS's weakened financial profile led by a deterioration in unrestricted cash. Since fiscal 2010, unrestricted cash has declined to $12.7 million at June 30, 2012 from $19.8 million. This equated to 57.9 days cash on hand (DCOH) from 102.9 DCOH in 2010.
ADDITIONAL BORROWING: Coupled with the decline in unrestricted cash and investments, DCHS intends to borrow approximately $9 million in USDA loans to fund the construction of a new medical office building (MOB). Pro forma cash to debt decreases to 34.4% from 59% and pro forma cushion ratio is very weak at 2.3x compared to Fitch's 'Below Investment Grade' median of 55.6% and 4.7x respectively.
LIGHT DEBT SERVICE COVERAGE: Pro forma maximum annual debt service (MADS) coverage was a low 1.2x through the six months ended June 30, 2012. Further, the organization's debt burden is high measured by MADS as a percentage of revenue of 5.9%, which compared unfavorably against the median of 2.7%.
LEADING MARKET POSITION: DCHS continues to maintain its dominant market position of 70% in its primary service area (PSA), which is improved from 68% in 2010.
IMPROVED BUT STILL WEAK OPERATING PERFORMANCE: DCHS improved its profitability position through the six months ended June 30, 2012 as the organization recorded a negative 0.3% operating margin and 6.1% operating EBITDA margin. These metrics are improved from fiscal 2011's negative 3.5% operating margin and 4% operating EBTIDA margin. Management continues to implement various cost reductions, while attempting to grow top-line revenue to enhance DCHS's profitability.
DCHS is a 96-bed acute care hospital providing primary and secondary services located in Iron Mountain, on Michigan's Upper Peninsula. In fiscal 2011 (Dec. 31 year end), DCHS had total revenue of $82.7 million.
Rating Downgrade to 'BB-'
The rating downgrade reflects DCHS's weakened balance sheet coupled with a more leveraged debt position. Additionally, the organization continues to lose money from operations, which marks the fourth consecutive year DCHS has incurred losses in operating income. At June 30, 2012 (unaudited), DCHS had 57.9 DCOH, 2.3x pro forma cushion ratio, and 34.4% pro forma cash to debt, which was down from fiscal 2011's 76.9 days, 2.9x cushion, and 59% cash to debt position. Management indicates the decrease in unrestricted cash was due to $1.9 million of capital expenditures on various operational items including information technology.
Management anticipates unrestricted cash balances to increase after meaningful use payments are received. Additionally, management intends to borrow approximately $9 million for the construction of a new MOB on the hospital's main campus. Management expects the new MOB will help solidify DCHS's primary care base in light of increased competition. DCHS's financial flexibility is more limited given the decline in liquidity and increased debt load, which is reflected in the current rating level.
Despite having improved profitability through the six months ended June 30, 2012, DCHS is still operating at a loss and management expects to finish fiscal 2012 with a negative $326,000 operating income. Although operating performance has historically been poor, management reports that there have been no financial covenant violations.
Other key credit concerns include its unfavorable payor mix and small revenue base.
Stable Rating Outlook
DCHS's rating is stable at the lower rating level and Fitch expects DCHS to continue to slowly improve its operating performance.
Key Credit Strengths
DCHS's key credit strengths continue to be its dominant market position, sole community provider status, and positive utilization trends in fiscal 2011. DCHS had an improved market share to 70% in fiscal 2011, up from 68% in 2010, and is designated as a sole community provider as its closest competitor is approximately 43 miles away. Bolstering the organization's improved market position is the positive trend in volumes for 2011 as inpatient admissions, surgeries, and outpatient visits all increased from prior year levels. Management indicates the positive trend is primarily due to DCHS's solid physician recruitment and successful hospitalist program.
Outstanding Debt Profile
All of DCHS's outstanding debt is fixed-rate and the system has no outstanding swaps. Overall, Fitch views DCHS's debt portfolio as conservative. In the fall of 2012, DCHS plans to borrow approximately $9 million in USDA loans for the construction of a new MOB on the origination's main campus. The USDA loans will be fixed rate. Total pro forma outstanding debt will be $37 million and aggregate maximum annual debt service of $5.4 million was provided by management.
DCHS covenants to submit certain annual financial and utilization information to the MSRB's EMMA system.
Disclosure to Fitch has been timely and extremely thorough and has occurred monthly. The disclosure includes a detailed management discussion and analysis, balance sheet, income statement, statement of cash flows, and utilization statistics; all of which have comprehensive comparative analyses.
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 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', July 23, 2012.
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