NEW YORK--()--Fitch Ratings has affirmed the rating on the approximately $6.58 million New Mexico Hospital Equipment Loan Council (Rehoboth McKinley Christian Health Care Services, Inc.) hospital facility improvement and refunding revenue bonds, series 2007A at 'B'.
The Rating Outlook is Stable.
The bonds are secured by a pledge of revenues and equipment. In addition, there is a debt service reserve fund.
KEY RATING DRIVERS
VOLATILE FINANCIAL PERFORMANCE WITH RECENT IMPROVEMENT: Rehoboth McKinley Christian Health Care Services' (Rehoboth) financial performance has historically been very volatile and reflective of the challenges of a hospital with a small revenue base and unfavorable payor mix. Most recently, a number of events caused significant deterioration to its financial position in fiscal 2011, which has rebounded through the nine months ended Sept. 30, 2012 (interim period). In addition, Rehoboth has announced its intent to pursue a strategic affiliation, which Fitch views favorably as it could help to stabilize operations and management turnover.
PRECARIOUS LIQUIDITY POSITION: Rehoboth has drawn down its cash position due to weak cash flow with only $1.4 million of unrestricted cash at Sept. 30, 2012 (9.3 days cash on hand) compared to $10.4 million at Dec. 31, 2010 (66 days cash on hand). Although Rehoboth remains in violation of its liquidity covenant, the failure to meet its days cash on hand requirement does not result in an event of default.
RELIANCE ON SUPPLEMENTAL FUNDING: Rehoboth remains highly reliant on sole community provider (SCP) funds and tax revenue from a mill levy for profitability. SCP funding was restored to historical levels in fiscal 2012, which contributed to the rebound in performance through the interim period.
CONTINUED MANAGEMENT TURNOVER: Over Fitch's rating history of Rehoboth, there has been significant management turnover. The current CEO is on an interim basis and is expected to remain at Rehoboth through the spring 2013.
SMALL REVENUE BASE: Fitch believes Rehoboth's small revenue base remains a key credit concern as the hospital has limited flexibility to handle adverse events, which was most recently demonstrated in fiscal 2011 but has also been evident in Rehoboth's history.
Rehoboth's rating history has fluctuated between the 'B' and 'BB' category since 2005 and reflects the volatility in Rehoboth's financial performance in addition to constant management turnover. Since Fitch's last review in June 2012, the interim CFO has since moved to a consultant position and the comptroller is now serving as interim CFO. A search is underway for both the CEO and CFO positions but the interim CEO has committed to stay in his capacity until spring 2013. The Board of Trustees announced in October 2012 their intent to explore possible strategic affiliations. Although management is still in the exploratory stage, Fitch believes a partnership or strategic affiliation would be a credit positive.
Financial performance has improved in fiscal 2012 from the very poor fiscal 2011 performance but still remains very volatile and dependent on supplemental funding. Supplemental funding in the form of SCP funds and the mill levy are critical, since without these funds, Rehoboth would be unprofitable. In fiscal 2011, there was litigation surrounding the mechanism behind the SCP funding, which resulted in a delay in the SCP payment. SCP funding was restored after the state litigation was settled in late fiscal 2011. Total supplemental funding is expected to be $12.8 million for fiscal 2012 compared to $8.7 million in fiscal 2011 and $10 million in fiscal 2010. Fitch views the timely and continued payment of this supplemental funding to be critical to the stability of Rehoboth's financials.
Rehoboth benefits from a mill levy imposed by the county, which is included in the total supplemental funding. The funds from the mill levy totaled $1.6 million in fiscal 2011 compared to $1.4 million in fiscal 2010 and are expected to total about $1.4 million in fiscal 2012. The mill levy expired in 2012 but McKinley County voters approved the renewal of the mill levy and changed the language to allow for the hospital to levy up to four mills from up to two mills. Also, the mill levy now allows for funds to be used as a match for SCP funding. This change becomes effective July 1, 2013. Hospital management is meeting with county officials to discuss its levy request for 2013. Rehoboth's debt service coverage calculation excludes the mill levy revenue as a source of funds.
Other financial improvement measures include cost controls resulting in about $7 million in savings, revenue cycle modifications increasing cash flow from collections, as well as a rate increase, which was implemented in July 2012. Although patient volumes were down about 6% in 2012 from 2011, a reduction in force completed in August 2012 resulted in improved operations. At Sept. 30, 2012 (nine-month interim), operating margin improved to negative 0.5% from negative 10.7% in fiscal 2011. Operating EBITDA margin was 4.3% at Sept. 30, 2012, also an improvement from negative 6.4% in fiscal 2011. Management expects break-even performance for fiscal 2012 and based on current performance, Fitch believes this is manageable.
Revenue cycle issues and the negative cash flow in fiscal 2011 resulted in a drain on cash to only 5.2 days cash on hand and 13% cash to debt in fiscal 2011, from 65.9 days and 136.8%, respectively, the prior year. Unrestricted cash and investments as of Sept. 30, 2012 resulted in 9.3 days and 21.9% cash to debt and should further improve by year-end as a portion of the SCP funding for fiscal 2012 has not yet been received to-date but is expected prior to year-end. Fitch notes that Rehoboth's liquidity position is precarious and any deterioration would lead to negative rating action. Rehoboth has a liquidity covenant of 23 days in fiscal 2012 and 25 days in fiscal 2013. Management does not expect to meet this covenant in fiscal 2012 but failure to do so does not constitute an event of default.
Although Rehoboth maintains the dominant market position of 62% in its service area, the payor mix is challenging with 28.1% of revenues from Medicaid as of Sept. 30, 2012 and 8.8% self-pay. Rehoboth's revenue mix is about 36% inpatient and 64% outpatient.
Total debt outstanding is $7.04 million including $6.58 million of bonds and $463,000 of capital leases. All of the debt is fixed rate and Fitch used maximum annual debt service (MADS) of $841,586, which includes the capitalized leases. Because of the low debt burden, MADS coverage through the nine months ended Sept. 30, 2012 was 3.2x.
The Stable Outlook reflects Fitch's expectation that Rehoboth will sustain and continue to better its improved financial performance. No additional debt is expected in the near to medium term.
Rehoboth McKinley Health Care Services, Inc. is a 69-bed general acute care hospital located in Gallup, New Mexico (138 miles west of Albuquerque, NM and 180 miles east of Flagstaff, AZ). Rehoboth changed its fiscal year end in fiscal 2010 to December from August. Total operating revenue in fiscal 2011 was $64.5 million. Rehoboth covenants to provide annual financial statements within 30 days after the approval of the report by the state auditor, which has usually resulted in fairly late receipt of audits. Rehoboth has also been posting monthly financial statements on EMMA.
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', dated June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated July 23, 2012.
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria