Fitch Downgrades Citrus Memorial Hospital's (FL) Bonds to 'B'; Placed on Negative Watch

NEW YORK--()--Fitch Ratings has downgraded the rating on approximately $38.4 million series 2002 bonds issued by the Citrus County Hospital Board (Citrus Memorial Health Foundation, Inc.) on behalf of Citrus Memorial Hospital (CMH) to 'B' from 'BB-'.

In addition, Fitch has placed the rating on Rating Watch Negative reflecting the concern that CMH's failure to meet covenanted debt service coverage (DSC) for fiscal 2013 could trigger an event of default. Fitch expects to resolve the Rating Watch in the next few months as fiscal 2013 metrics become available.

SECURITY

The series 2002 bonds are secured by a pledge of gross revenues of the Foundation and a debt service reserve fund.

KEY RATING DRIVERS

DETERIORATING FINANCIAL PROFILE: The rating downgrade to 'B' reflects the unstable operating environment related to an ongoing legal dispute over the control of the hospital, which has resulted in a deteriorating financial profile over the last three years. CMH's financial performance in fiscal 2012 (Sept. 30 year end) deteriorated for the third consecutive year and was plagued by undependable tax revenue, ongoing legal costs, system conversion issues, and loss of revenue due to increased outpatient competition. CMH's DSC calculation per the master trust indenture (MTI) was 1.26x and the DSC covenant was only met because the Citrus County Hospital Board (CCHB) released $2 million of funds to the hospital, which was to be used to pay down a portion of the series 2006 bonds.

ACCELERATED REPAYMENT OF DEBT: The downgrade also reflects the accelerated repayment of CMH's outstanding debt as the financial deterioration of the hospital has led the holder of the series 2006 bonds (SunTrust Bank) to exercise its right to a mandatory tender following a 366-day notice period. SunTrust Bank exercised its right in April 2013; therefore the remaining $6 million of bonds outstanding is to be paid by April 2014. Repayment of the bonds could deplete CMH's cash holdings and severely compromise liquidity, absent the receipt of additional funds from the CCHB.

POTENTIAL CROSS-DEFAULT: The accelerated repayment of the series 2006 bonds could also result in DSC below 1.1x for fiscal 2013, which may trigger an event of default under the 2006 loan agreement. An event of default under the 2006 agreement, which would be at the discretion of the bank, would result in a cross-default to the series 2002 bonds.

RATING SENSITIVITIES

NEGATIVE RATING MOVEMENT: An event of default would result in further downward rating action.

ABILITY TO MEET COVENANT CALCULATIONS: If CMH can meet its covenant calculations (1.1x debt service coverage and 65 days cash on hand), the Rating Watch could be resolved and the rating could remain the same. Debt service coverage through the six months ended March 31, 2013 including the accelerated repayment of debt was 1.12x.

RESOLUTION OF BROADER CONFLICTS: The resolution of the broader conflicts between CMH and CCHB, as well as the near-term financial strains, could provide a foundation for the resolution of the Rating Watch and a higher rating.

CREDIT PROFILE

Ongoing Governance Issues

Citrus Memorial Health Foundation operates CMH under a long-term lease with CCHB. When the lease was executed, CCHB entered into a hospital care agreement which stated that CCHB would provide funds to the Foundation through its ability to levy ad valorem taxes as an independent special district in Citrus County. The CCHB can levy taxes up to 3 mills of assessed value.

From 2009-2012, the Foundation and CCHB have been involved in a legal dispute regarding future operational control of the facility. Because of this, CCHB began reducing the tax millage rate as well as withholding tax revenue that has been levied. The tax millage for fiscal 2013 was 0.245 mills and the hospital's fiscal 2013 budget incorporated $4 million of tax revenue. Through the six months ended March 31, 2013, none has been received. The total amount due to the Foundation from fiscal years 2009-2012 is approximately $7 million.

One case currently being litigated relates to a local bill that would grant control of the hospital to the CCHB. The CCHB is made up of five appointed members by the Governor. The case is at the state supreme court whereby the Foundation challenged the constitutionality of the local bill. Management expects this case to be resolved in the next 12-14 months. Fitch will assess the impact of the outcome of this case when it is resolved.

Weak Financial Profile

Fiscal 2012 financial performance was poor as issues with its information technology system and a decline in net patient revenue exacerbated the already challenged situation related to the withholding of tax revenue and ongoing legal expenses. Fiscal 2012 net patient revenue was $147 million compared to $151 million the prior year as one of CMH's competitors opened a cardiac catheterization lab, which resulted in lost volume.

In fiscal 2012, CMH reported a $6.9 million operating loss (negative 4.6% operating margin) compared to a $3.7 million operating loss (negative 2.4% operating margin) the prior year. In fiscal 2012, CMH received only $800,000 of tax revenue of the $2.2 million levied and collected by CCHB. In addition to the $800,000, CCHB released $2 million of funds on the condition that the hospital matched the funds by $1 million to pay down a portion of the series 2006 bonds.

Debt service coverage (as calculated by Fitch) was very weak at 0.8x for fiscal 2012, but the organization met its 1.1x coverage covenant since the $2 million from CCHB was counted toward net income available for debt service although not reflected on the income statement.

At March 31, 2013 CMH had $26.5 million in unrestricted cash and investments, which translated into 65.1 days cash on hand (DCOH), 5.7x cushion ratio, and 49.9% cash to debt. CMH's liquidity position is down from fiscal 2011 at $38.2 million and CMH will likely trigger its liquidity covenant (65 days cash on hand), as the remaining $6 million pay down of the series 2006 bonds will need to be funded from hospital cash unless CCHB releases the funds they have been withholding.

Potential Event of Default

With the acceleration of the series 2006 bonds, the fiscal 2013 DSC covenant calculation will be based on debt service of approximately $9.967 million, which includes the full principal of the series 2006 debt. The DSC calculation for the six months ended March 31, 2013 including the accelerated debt is 1.12x. However, the bank documents do not clearly specify if DSC below 1.1x is automatically an event of default and the bank could extend the hospital a cure period. In addition, the hospital's cash position would be further depleted after the paydown of the series 2006 bonds and would hamper its ability to meet its DCOH covenant at Sept. 30, 2014. Pro forma DCOH at March 31, 2013 including the paydown of the series 2006 bonds results in 50 days cash on hand.

Future Unknown

Adding to the uncertainty of CMH's future are the current actions by both the Foundation and CCHB to evaluate other options for the hospital, including sale, lease or affiliation. However, these discussions are being done independently of each other and any decision will require approval from both boards. Fitch believes some cooperation between the two entities will be needed especially as the organization's future viability in the post-reform environment is at stake.

Rating Watch

Fitch will assess Citrus' financial performance at fiscal 2013 year end and their ability to meet covenant requirements. Further negative rating pressure would occur if there is an event of default. However, the release of tax revenues collected from prior years to CMH and/or fully utilizing the taxing capability for the benefit of CMH would be viewed positively by Fitch.

About the Organization

CMH is a 198 bed community hospital located in Inverness, FL, approximately 75 miles north of Tampa. In fiscal 2012, CMH had $151 million in total operating revenue. CMH covenants to provide quarterly disclosure by written request to bondholders who hold more than $1 million in bonds and distributes annual financial statements to the Municipal Securities Rulemaking Board's EMMA system.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 12, 2012);

--'Nonprofit Hospitals and Health Systems Rating Criteria' (July 23, 2012).

Applicable Criteria and Related Research

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=790415

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Contacts

Fitch Ratings
Primary Analyst
Michael Burger, +1-212-908-0555
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Emily Wong, +1-212-908-0651
Senior Director
or
Committee Chairperson
Eva Thein
Senior Director, +1-212-908-0674
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Michael Burger, +1-212-908-0555
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Emily Wong, +1-212-908-0651
Senior Director
or
Committee Chairperson
Eva Thein
Senior Director, +1-212-908-0674
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com