NEW YORK--()--Fitch Ratings assigns a long-term rating of 'A' to approximately $240.8 million of series 2013A, $19.5 million of series 2013B, and $93.9 million of series 2013C revenue bonds to be issued by the Maryland Health and Higher Educational Facilities Authority (MHHEFA) on behalf of University of Maryland Medical System (UMMS). In addition, Fitch affirms its 'A' rating on the outstanding debt issued through MHHEFA on behalf of UMMS, Civista Medical Center, and Shore Health.
The series 2013 bonds are expected to be fixed rate and proceeds will be used to finance the St. Joseph's Medical Center acquisition and other projects, refund UMMS series 2004B, Civista Medical System series 2005, and Shore Health series 1998 bonds outstanding in total amount of $98.5 million, refinance certain other outstanding indebtedness, and pay costs of issuance. The bonds are expected to price the week of Feb. 18, 2013 via negotiation.
Debt payments are secured by a pledge of the gross revenues of the obligated group.
Strong Relationships: UMMS leverages its strong relationship with the state and University of Maryland's School of Medicine (SOM), which is a key differentiating factor compared to UMMS' competitors. The state continues to provide operating as well as capital support and the system is aligned with the SOM, which trains 50%-60% of the physicians in the state.
Growing Regional Footprint: UMMS has been strengthening its regional presence through affiliations with community hospitals and driving tertiary business to its flagship facility, University of Maryland Medical Center (UMMC). This has led to strong volume growth and UMMS maintains the leading market position within the state of Maryland with a market share of 23.1% in the PSA.
Near-term Pressure On Operating Performance: Operating metrics were strong in the last three years, with both operating margins and operating EBITDA margins above rating category medians. However, profitability is expected to weaken in 2013 and remain pressured for the next three to four years due to significant losses at St. Joseph Medical Center (SJMC) that was acquired in December 2012.
Weak But Growing Liquidity: Liquidity ratios have historically been light for the rating category, but have remained relatively stable and shown modest improvement over the last five years. Given capital needs in the horizon, balance sheet metrics will likely remain stressed.
Elevated Debt Burden: Pro forma debt to capitalization of 53.4% and maximum annual debt service (MADS) as a percentage of revenues of 3.7x are weak for the rating category, but in line with historical levels, which averaged 52.7% and 4.2x, respectively, from fiscal 2009 to 2012. The 2013 transaction will refinance $220 million of short-term debt related to the SJMC acquisition, and fund an additional $55 million of other system capital costs.
Aggressive Capital Structure: With $606.8 million of notional amount outstanding, UMMS' swap portfolio has exhibited significant volatility over the last several years. Collateral posting requirements have been sizable, with $108.9 million posted at Dec. 31, 2012. Combined with UMMS' light liquidity, risks related to its capital structure are heightened due to collateral posting requirements.
The 'A' rating assignment and affirmation is based on UMMS' strong relationship with the State of Maryland and University of Maryland's SOM and the system's essentiality as a provider of certain high-end services, including the state's largest trauma center. Other key credit strengths include its growing regional presence and revenue diversity through selective acquisitions and affiliations. Expected pressure in profitability from the addition of SJMC presents credit concerns, but is mitigated by potential strategic opportunities.
Once a state-owned institution, UMMS continues to benefit from its close ties to the State of Maryland (general obligation bonds rated 'AA+'). In the last four fiscal years, UMMS received over $75 million from the state for capital projects in addition to ongoing operating support for certain programs that are deemed to be essential (about $3 million annually for trauma services). UMMS' strong relationship with the University of Maryland's (rated 'AA+') SOM enhances its ability to reduce costs and increase revenue as the faculty at SOM (approximately 1,000 physicians) is the medical staff at UMMC. A key relationship going forward will be between the community physicians and the academic physicians as the system continues to grow. Further, UMMC's ability to provide high end services evidenced by its notably high case mix index of 2.3 secures source of referrals from a large service area.
UMMS continues to expand its regional footprint, most recently with the acquisition of SJMC from Catholic Health Initiatives (revenue bonds rated 'AA-'). In 2007, the 263-bed community hospital in Towson, MD faced litigation related to its cardiology practice, resulting in fines, loss of doctors and volumes, and rapid financial deterioration. The hospital continues to operate at significant losses, but presents an opportunity to provide UMMS with additional capacity for tertiary care to accommodate short-term demand and long-term capital avoidance. SJMC is located in a favorable service area with low Medicaid and self-pay exposure, and is well situated to expand UMMS' northern regional care network. UMMS plans to leverage its existing physician relationships to rebuild physician loyalty and restore volume, and management notes they are already seeing increased physician interest. SJMC is projected to near breakeven in cash flow in 2014, and in overall operations by 2018. UMMS expects additional capital expenditures in the next five years to support physician and clinical development programs, capital improvements, and IT, which will be evaluated based on need and financial capacity. The asset purchase was completed on Dec. 1, 2012, and SJMC's December 2012 financial performance is incorporated into the system's Dec. 31, 2012 interim financials.
UMMS is a key participant in an ongoing discussion with the state, University of Maryland, Prince George's County, and Dimensions Health System (revenue bonds rated 'CC') in developing a financially feasible healthcare delivery system in Prince George's County. Management indicates that discussions are preliminary and Dimensions' long-term capital needs will have significant outside financial support, but UMMS does not expect to commit capital outside of support costs related to the financial viability study process.
UMMS revenue base continues to diversify and grow, with total operating revenues of $2.3 billion in the fiscal year ended June 30, 2012. Fiscal 2011 and 2012 produced good profitability metrics with operating margins of 4.6% and 3%, respectively compared to Fitch's 'A' category median of 2.8%. Similarly, operating EBITDA margins were strong at 12.4% and 10.4% compared to the respective median of 9.8%. Through the six-month interim period ended Dec. 31, 2012, profitability was 0.8% relative to 2.3% the prior year period. Some of the decline was budgeted due to low rate increase expectations, and seasonality of volumes, which is typically strongest in the third and fourth quarters. The remaining variance was largely driven by the inclusion of SJMC for the month of December, when SJMC sustained operating losses of $3.6 million as well as a one-time loss of $5.3 million related to receivables. JMC is expected to continue diluting the system's profitability, as it is not expected to become profitable for another five years. Management has budgeted 0.3% for operating margin for fiscal 2013, which is expected to gradually return to around 2% in the next three to four years. Given the strategic opportunities present in SJMC and management's historical ability to execute, Fitch believes this is reasonable.
At Dec. 31, 2012, unrestricted cash and investments totaled $732.4 million, which reflects an adjustment to deduct $102 million in line of credit draws used to fund the swap collateral posting. With 117.4 days cash on hand and 8.2x cushion ratio, liquidity metrics are unfavorable relative to respective medians of 191.0 days and 16.3x. However, liquidity has remained stable and exhibited modest growth over the last five years. Given capital plans in the horizon, liquidity is likely to remain stressed.
At Dec. 31, 2012, UMMS's outstanding debt totaled $1.4 billion, including a $220 million short-term loan related to SJMC that will be refinanced as part of the 2013 transaction. Of the bonds outstanding, approximately 57% are fixed, and 43% are floating. The 2013 bonds will refinance $220 million of short-term debt related to the SJMC acquisition, fund an additional $55 million of other system capital costs, refund three series of outstanding bonds, refund certain outstanding indebtedness, and pay costs of issuance. Pro forma debt to capitalization of 53.4% and MADS as a percentage of revenues of 3.7x are weak for the rating category, but in line with historical levels, which averaged 52.7% and 4.2x, respectively, from fiscal 2009 to 2012. MADS coverage has improved since 2009, and is adequate at 3.1x through the interim period. Fitch used a pro forma MADS of $89.3 million, which includes estimated debt service related to bank loans and capital leases.
Upon completion of the 2013 financing, Civista Medical Center, Chester River Hospital, and St. Joseph Medical Center will join the obligated group. The new obligated group will include nine hospitals and represent 94.9% of total assets and 90% of operating revenues. UMMS has other long term capital needs including a replacement facility for Shore Health and a capital commitment to Upper Chesapeake of $150 million for expansion and renovation, which will be evaluated when plans are finalized.
Given market conditions, swap collateral posting requirements have been sizeable and volatile. As of Dec. 31, 2012, the amount of collateral posting required was $108.9 million and UMMS draws on its line of credit for these requirements. Due to UMMS' already weak balance sheet, further demands on liquidity are of concern.
The Stable Outlook reflects Fitch's expectation that UMMS will execute the integration of SJMC as planned, and meet its projected profitability metrics while maintaining its liquidity. Fitch will evaluate the impact of its longer term capital needs when plans are finalized.
UMMS is comprised of the flagship facility, University of Maryland Medical Center located in Baltimore, Maryland, and several community and specialty hospitals with total operating revenue of $2.4 billion in fiscal 2012. UMMS covenants to provide annual and quarterly disclosure, which is available 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', June 12, 2012;
--'NonProfit Hospital and Health System Rating Criteria', July 23, 2012.
In addition to the sources of information identified in Fitch's Rating Criteria, this action was additionally informed by information from J.P. Morgan Securities, LLC.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria