NEW YORK--()--Fitch Ratings has affirmed the 'BBB+' long-term rating on the following Baptist Health Care Corporation's (BHCC) outstanding debt:
--$150,827,000 Escambia County, FL Health Facilities Authority revenue bonds (Baptist Hospital Inc. Project), series 2010A.
The Rating Outlook is Stable.
Security interest in certain pledged revenues, mortgage pledge on Gulf Breeze Hospital, and debt service reserve fund.
KEY RATING DRIVERS
SUSTAINED OPERATING PERFORMANCE: BHCC earned $17.3 million in income in fiscal 2012 (Sept. 30, 2012; audited), which was very consistent with 2011's $17.2 million profit. For the second consecutive year, BHCC's operating margin and operating EBITDA margin (2.7% and 8.5%) exceeded Fitch's 'BBB' category medians.
MARKET SHARE GROWTH: Despite operating in a very competitive service area, BHCC garnered the top market position in its primary service area (PSA) in 2012. Supported by strong volume growth through successful strategic physician alignment initiatives, BHCC's market share grew to 35% in 2012 from 34% in 2011, which was slightly ahead of Sacred Heart Hospital's 34% (part of Ascension Health; revenue bonds rated 'AA+'; Outlook Stable by Fitch).
WEAK LIQUIDITY: As of Dec. 31, 2012 (three-months into fiscal 2013; unaudited), BHCC had an unrestricted cash and investments total of $161.2 million, which translated into 95.6 days cash on hand, 8.5x cushion ratio, and 67.2% cash to debt. These metrics compared unfavorably against Fitch's medians, but improved consistently since fiscal 2008.
MANAGEABLE CAPITAL PLANS: With all major construction completed, management intends to spend approximately $93 million on capital over the next three years, which Fitch views as manageable. BHCC has no plans for any significant additional debt over the medium term.
STABLE PERFORMANCE EXPECTED: Fitch expects BHCC to maintain solid operating performance as it continues to capitalize on its strategic investments. Positive rating movement is limited by its current financial profile, and would require a significant improvement in liquidity as well as better profitability and debt service coverage metrics to move into the 'A' category.
RATING AFFIRMATION AT 'BBB+'
The 'BBB+' rating affirmation is supported by BHCC's sustained operating performance, which helps produce satisfactory debt service coverage, improved market position and utilization trends, and manageable capital plans over the medium term.
For the second straight year, BHCC recorded a good operating profit ($17.3 million), which led to solid debt service coverage of 2.9x in fiscal 2012. The organization had a 2.7% operating margin and 8.5% operating EBITDA margin, which was improved from fiscal 2010's 1.1% operating and 6.9% operating EBITDA margins. Through the three-month interim period in fiscal 2013, BHCC earned $5.1 million, which demonstrated further improvement - up to a 3.1% operating margin and 8.8% operating EBITDA margin. Overall, Fitch views BHCC's sustained and/or improved operating metrics favorably and as primary credit strength. In fiscal 2013, management is budgeting for a 2.8% operating margin, which Fitch views as attainable.
Underpinning the improved performance are several initiatives such as growing the organization's employed physician base through strategic physician alignment, implementation of various expense reduction and revenue enhancement plans (including revenue cycle and supply chain management), and enhancing key service lines (cardiology and orthopedics) that have helped grow the organization since 2010. Due to effective management practices, BHCC was able to overtake Sacred Heart Hospital in 2012 as the market share leader, which Fitch views as a major milestone. Supporting market share growth has been the increase in inpatient admissions, inpatient and outpatient surgeries, and overall outpatient visits.
KEY CREDIT CONCERNS
Fitch's key credit concerns include BHCC's weak balance sheet for the rating level and competitive service area. In fiscal 2012, BHCC had 103.5 days cash on hand, 8.9x cushion ratio, and 70.1% cash to debt, which compared unfavorably against Fitch's 'BBB' category medians of 138.9 days, 9.4x, and 82.7%. However, absolute cash has improved since 2008 as levels increased by approximately 49% to $169.7 million in fiscal 2012 from $113.5 million, which Fitch views positively. With that said, BHCC's weak balance sheet is Fitch's primary credit concern.
BHCC operates in a highly competitive service area, which is split among three main providers. BHCC is the market leader; however Sacred Heart Hospital maintains a very close second position of 34%, while West Florida (part of HCA) has a 24% share. Fitch believes it is essential for BHCC to continue its strategic alignment initiatives with physicians in the service area to maintain its positive volume trend. Additionally, Fitch believes it's imperative for BHCC to continually invest in its physical plant to maintain competitiveness.
As of Sept. 30, 2012, total outstanding debt was approximately $241 million and includes $186 million of bonded debt, $38 million of note payables, and $16 million of capital leases and other debt. Fitch used a maximum annual debt service (MADS) of $18.9 million, which incorporates all debt (assumes full amount drawn under capital lease) and treats balloon indebtedness in accordance with BHCC's master trust indenture. The debt portfolio is 74% fixed rate and 26% variable rate, which Fitch views as relatively conservative.
BHCC has three outstanding swaps for a total notional amount of $65.4 million and includes a basis swap with Citi for $40 million and two floating to fixed rate swaps with Bank of America for $25.4 million. BHCC is required to post collateral at its current rating level if the mark to market exceeds $3.25 million per counterparty. To date, there have been no collateral postings.
MADS coverage by EBITDA and operating EBITDA were both 2.9x, in fiscal 2012, which exceeded Fitch's 'BBB' category medians of 2.8x and 2.5x, respectively. BHCC's recent sustained operating performance has supported increased levels of coverage over the past two years, which is viewed positively. Fitch believes BHCC needs to maintain current levels of profitability in order to generate satisfactory debt service coverage metrics.
The Stable Outlook reflects Fitch's expectation that BHCC will continue to benefit from its various strategic improvement initiatives that will allow the organization to grow upon its leading market position. With consistent generation of profitability, Fitch expects BHCC to build its liquidity position to be more in line with its rating level.
BHCC operates Baptist Hospital, a 492-bed tertiary care hospital in Pensacola, FL; Gulf Breeze Hospital, a 77-bed acute care hospital in Gulf Breeze, FL; Baptist Manor, a 170-bed skilled nursing facility, and other health care related entities. Total operating revenue in fiscal 2012 was approximately $640 million. BHCC won the Malcolm Baldrige National Quality Award in 2003 and is an indicator of the organization's high quality and safety standards. BHCC covenants to provide annual audits within 150 days of fiscal year end and quarterly unaudited financials for the first three quarters within 45 days of quarter end.
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
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria