NEW YORK--()--Fitch Ratings has affirmed the 'A' long-term rating on the following North Carolina Medical Care Commission's health care facilities revenue bonds issued on behalf of Cleveland County HealthCare System (CCHS):
--$38.8 million series 2011A;
--$35.4 million series 2004A.
The 'A' rating is an unenhanced rating and does not incorporate the guarantee of the debt (effective March 11, 2013) by Carolinas HealthCare System (CHS), which Fitch does not rate.
The Rating Outlook is Stable.
Debt payments are secured by a pledge of the net revenues of CCHS.
KEY RATING DRIVERS
RELATIONSHIP WITH CAROLINAS HEALTHCARE SYSTEM: Fitch views the benefits of CCHS's relationship with the Charlotte-Mecklenburg Hospital Authority, which directly and through its affiliation does business as Carolinas HealthCare System (CHS) favorably and as a primary credit strength. CCHS receives various forms of support including management, operational, and financial expertise. Effective March 11, 2013, CHS plans to execute a debt payment guaranty agreement of CCHS's debt. The 'A' rating is based on CCHS's creditworthiness and does not incorporate the benefit of the guarantee since Fitch does not maintain a rating on CHS.
IMPROVED FINANCIAL PROFILE: CCHS has an improved financial profile since Fitch's last review in April 2011 as the organization earned $6 million from operations in fiscal 2012 (Dec. 31; draft audit), which was up from fiscal 2010's $3.8 million loss. Additionally, CCHS's balance sheet and debt service coverage metrics reached five-year highs as the organization successfully implemented cost reduction and revenue enhancement initiatives. However, CCHS is dependent on supplemental Medicaid funding for profitability.
WEAK SERVICE AREA CHARACTERISTICS: Despite having a leading market share of approximately 65% in its primary service area (PSA), CCHS operates in a difficult service area with a high percentage of Medicaid and self-pay patients. Historically, CCHS's weak service area characteristics, highlighted by poor socioeconomic indicators and high unemployment, have been Fitch's primary credit concerns,
MANAGABLE CAPITAL PLANS: With no major construction projects planned, management intends to spend approximately $70 million on capital over the next five years, which Fitch views as manageable.
POSITIVE RATING MOVEMENT: Fitch expects CCHS to sustain its improved financial performance and continued positive financial trends could lead to positive rating pressure over the medium term.
RATING AFFIRMATION OF 'A' UNENHANCED RATING
The rating affirmation of 'A', based on CCHS's creditworthiness, reflects CCHS's strong relationship with CHS, improved financial performance, stable market position, and manageable capital needs. Fitch views CCHS's relationship with CHS as a primary credit strength. CHS employs key members of CCHS's management team, offers financial oversight, approves operating and capital budgets, and provides CCHS with economies of scale associated with a large healthcare system, which include managed care and group purchasing contract assistance, as well as management of information technology, physician practices and revenue cycle. CHS is the largest healthcare system in North and South Carolinas, providing access to all primary and secondary services in addition to tertiary and quaternary services. CHS owns, leases, or manages 38 hospitals and has various physician and outpatient operations at over 650 locations.
Effective March 11, 2013, CHS plans to enter into an irrevocable guaranty agreement (parity obligation to CHS's debt), in which CHS will guaranty payment on CCHS's outstanding bonds. This guaranty is viewed positively, however, is not reflected in the rating since Fitch does not rate CHS.
At Dec. 31, 2012 (draft audit), CHS had a 2.5% operating margin and 9.7% operating EBIDTA margin, which compared consistently with Fitch's 'A' category medians of 2.8% and 9.8%, respectively. These metrics improved from fiscal 2011's 0.2% operating margin and 7.6% operating EBITDA margin and demonstrate two consecutive years of improvement. Unrestricted cash and investments totaled $141. 5 million at Dec. 31, 2012, which translated into 230.2 days cash on hand, 25.6x cushion ratio, and 191.1% cash to debt. All of CCHS's liquidity metrics compared favorably against Fitch's 'A' medians, which Fitch views as an additional credit strength. Debt service coverage in 2012 was 4.7x (by EBITDA), up from fiscal 2010's 2.7x.
In 2012, CCHS maintained its solid market share of 65%. However, the organization still operates in a weak service area, which Fitch views as a primary concern. Unemployment in Cleveland County was 10.5% in 2012, which exceeds state and national averages and is reflected in the organization's weak payor mix. Further, Fitch believes CCHS's profitability will be challenged by reductions in governmental reimbursement over the medium term. CCHS received approximately $9.7 million of supplemental Medicaid funding in fiscal 2012, which is expected to be at the same level for fiscal 2013.
CONSERVATIVE DEBT PROFILE
At Dec. 31, 2012, CCHS had approximately $74 million in outstanding debt - all fixed rate with no outstanding swaps. Fitch views the organization's debt profile as conservative. CCHS has no near term plans for additional debt.
The Stable Rating Outlook reflects Fitch's expectation that CCHS will sustain its current operating performance improvement due to its relationship with CHS.
Cleveland County HealthCare System operates two hospitals, one nursing home and a long-term acute care hospital with a total of 424 (514 licensed) acute care beds in Cleveland County, NC approximately 45 miles west of Charlotte. In fiscal 2012 (unaudited), total operating revenues were $243.5 million. CCHS covenants to provide annual audited financial statement and quarterly financial statements (for the obligated group only) to the MSRB's EMMA system.
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