NEW YORK--()--Fitch Ratings has assigned a 'BBB+' rating to Washington Hospital's (WH) approximately $15 million revenue bonds, series 2013A. In addition, Fitch affirms the 'BBB+' rating on WH's outstanding debt issued by the Washington County Hospital Authority, PA:
--$17.2 million series 1998;
--$11.3 million series 2001A;
--$7.8 million series 2001B;
--$14 million series 2007A;
--$23.3 million series 2007B.
The Rating Outlook is Stable.
Bond proceeds will be used to refund the organization's outstanding series 1998 bonds and pay costs of issuance. The series 2013A bonds are expected to price the week of Jan. 28, 2013 via negotiation.
The series 1998 and 2001A bonds are insured by Ambac Assurance Corp., which is not rated by Fitch. The series 2001B, 2007A&B, and 2008A bonds are supported by irrevocable letters of credit (LOC) from PNC Bank (rated 'A+/F1'; Outlook Stable by Fitch). All of WH's LOCs are extended through either 2014 or 2015.
The bonds are secured by gross receipts of the hospital and first mortgage lien on the hospital's main campus. Currently, the series 1998 and 2001A bonds are also secured by a debt service reserve fund. Additionally, the series 2001B, 2007A&B, and 2008A bonds are also secured by respective LOCs.
KEY RATING DRIVERS
LEADING MARKET POSITION: WH has the leading market share of 58.7% in its primary service area (PSA), which accounts for over 80% of the organization's discharges. The next closest competitor, Canonsburg Hospital, has a 12% market position.
SATISFACTORY FINANCIAL PERFORMANCE: Financial performance through the year-end (June 30, 2012; audited) was satisfactory for the rating level, which was highlighted by a good balance sheet and adequate profitability - thus supporting maximum annual debt service (MADS) coverage metrics consistent with Fitch's 'BBB' category medians.
AGGRESSIVE DEBT PROFILE: WH has high variable-rate debt exposure with approximately $58.5 million in outstanding variable-rate demand bonds (VRDBs). Fitch views this as a primary credit concern and high for the rating level given the exposure to put, renewal, and remarketing risks.
GOOD SERVICE AREA: Operating close to Pittsburgh, PA, WH's service area has increasing population, economic and personal wealth trends that compare favorably against state averages. However, the area is fairly competitive and the payor environment is dominated by Highmark.
MANAGEABLE CAPITAL PLAN: Management has no significant planned capital expenditures over the medium term. Over the next five fiscal years, WH is budgeting to spend a manageable $60.3 million.
AFFIRMATION OF 'BBB+' RATING
The 'BBB+' rating affirmation continues to be supported by WH's leading market position, satisfactory financial performance, manageable capital plan, and good service area characteristics. Fitch's primary credit concerns include WH's VRDB exposure, a concentration of payors, and competitive market environment.
In fiscal 2012, WH earned approximately $2.1 million in income, which translated into a 0.8% operating margin and 7.4% operating EBITDA margin. Both metrics dropped from previous year's levels of 3.5% and 10.3%, respectively, which Fitch views with some concern. Additionally, three-months through fiscal 2013 (Sept. 30, 2012; consolidated and unaudited) WH lost approximately $1.7 million (negative 2.7% operating margin), which was off management's budgeted loss of $606,000 and illustrated a further decline in operating performance. Fitch notes that the declining performance from the consolidated entity includes losses from WH's employed physician group, which is not in the obligated group (OG) nor the OG metrics cited below.
Generally, utilization patterns within the larger Pittsburgh marketplace appear to be down from prior years, which are contributing to the budget shortfall. Management attributes the recent dip in operating profitability to several factors such as lower patient utilization, fewer readmissions to the hospital and increased observation cases. Specifically, inpatient admissions declined to 4,601 from 5,171 through the four-month interim period (Oct. 31, 2012; unaudited), while observation stays increased to 1,136 from 1,004 in 2011. Additionally, new born births, total surgeries and outpatient visits were are down from the previous year's levels.
WH has put in place several cost reduction and revenue enhancement initiatives such as a reduction in force, new group purchasing contracts and supply chain savings, which should increase profitability. Management is budgeting to end fiscal year 2013 with an approximate $6 million gain (2.5% operating margin) on a consolidated basis. Fitch believes it's imperative for WH to finish the fiscal year with a profit in order to generate sufficient levels of MADS coverage commensurate with Fitch's 'BBB' category medians.
Liquidity and MADS coverage through the four-month interim period (Oct. 31, 2012; unaudited and OG only financials), remained stable as WH had 185.8 days cash on hand, 12x cushion ratio, and 115.4% cash to debt, which compared favorably against Fitch's 'BBB' category medians of 138.9 days, 9.4x, and 82.7%. MADS coverage was 2.6x by and 2.3x by operating EBITDA, was consistent with Fitch's medians of 2.6x and 2.3x, respectively. Overall, the obligated group makes-up 87.7% of total revenue.
NEW ISSUE DETAILS
The 2013A bond issuance will be issued as traditional fixed-rate bonds. The bonds will be used to refund WH's currently outstanding series 1998 bonds and pay costs of issuance.
The Stable Outlook reflects Fitch's belief that WH's financial performance will rebound from interim levels as strategic market growth should bolster profitability and liquidity over the medium term. Fitch will continue to monitor WH's operating performance as a further decline in profitability would be viewed negatively.
CREDIT & DEBT PROFILE
WH is a 260-staffed-bed community hospital located in Washington, PA, which is approximately 36 miles southwest of Pittsburgh. Total operating revenue in fiscal 2012 was $271 million (less provision from bad debts).
WH had approximately $86.3 million of debt outstanding with 32% underlying fixed-rate and 68% underlying variable-rate, which Fitch views as aggressive for a 'BBB' rated borrower. The organization has two outstanding swaps related to its series 2007B and 2008A bonds that are swapped to fixed-rate. As of Sept. 28, 2012 the total notional amount was $36.6 million with a mark-to-market valuation of negative $7.5 million. Per its swaps agreements, WH is not required to post collateral on its swaps.
Washington Hospital covenants to disclose annual audited financial information to the MRSB's EMMA system. Management was candid and timely in its responses to Fitch during the credit process, which is viewed favorably.
For more information see Fitch's last press release, 'Fitch Affirms Washington Hospital's (PA) Revs at 'BBB+'; Outlook Stable, April 25, 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.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated 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