NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB+' rating on approximately $73.1 million Cuyahoga County hospital facilities revenue bonds, series 2000 (UHHS/CSAHS - Cuyahoga, Inc. and CSAHS/UHHS - Canton, Inc. Projects).
The Rating Outlook is revised to Stable from Negative.
The bonds are secured by a pledge of the gross revenues of the Mercy Medical Center (MMC; formerly known as UHHS/CSAHS - Cuyahoga, Inc.) obligated group, a first lien mortgage of hospital property and a debt service reserve fund.
KEY RATING DRIVERS
SUPPORT FROM SPONSOR: Sisters of Charity of Health System (SCHS) is the sole corporate member of MMC. Although SCHS does not guarantee and is not obligated to pay debt service on MMC's obligations, Fitch views the close relationship with and financial strength of SCHS as a key credit factor in support of the rating. At Dec. 31, 2012, SCHS had $418.6 million of unrestricted cash and investments which equates to 202 days of cash on hand and 194% cash to long-term debt (including MMC's series 2000 bonds).
INTERIM OPERATING IMPROVEMENT: While Fitch remains concerned by MMC's sizable operating losses in fiscal 2012, interim performance through the six months ended June 30 2013 indicates that certain cost control initiatives are finally taking hold.
WEAK DEBT SERVICE COVERAGE: MMC's light profitability results in weak debt service coverage. As per the master trust indenture, MMC generated debt service coverage on its series 2000 bonds of 1.4 times (x) in both 2011 and 2012. However, as calculated by Fitch, MMC generated coverage of maximum annual debt service (bonded debt plus capitalized leases) on a consolidated basis of 0.6x and 0.7x in 2011 and 2012, respectively.
LIGHT LIQUIDITY METRICS: At June 30, 2013, MMC's $58.4 million of unrestricted cash and investments equated to 80.7 days cash on hand, a 5.2x cushion ratio and 61.0% cash to debt.
INABILITY TO IMPROVE OPERATING PROFITABILITY: Management has identified several revenue enhancement strategies and various cost savings items that are intended to improve operating profitability. Fitch expects to see improved performance in 2013 with the full realization of performance improvement initiatives in 2014. An inability to improve operations could pressure the rating.
Mercy Medical Center, located in Canton, Ohio, is a teaching hospital with 473 licensed beds, of which 337 are staffed. Total operating revenues were $275.1 million in fiscal 2012.
SUPPORT OF SPONSOR
Sisters of Charity Health System (SCHS) is the sole corporate member of MMC and MMC is included in SCHS's consolidated financial statements. Although SCHS is not legally obligated on MMC's bonds, Fitch views the close relationship to SCHS and the financial strength of SCHS as a key credit strength in support of the rating. SCHS has been deeply involved in hospital operations and has expanded the support services that it provides to MMC. In 2012, MMC paid approximately $8.2 million to SCHS for various support services including information technology, billing, executive compensation, contracting, treasury services and supply chain management. In fiscal 2010, SCHS waived a $4.5 million member assessment. At Dec. 31, 2012, SCHS had $418.6 million of unrestricted cash and investments which equated to 202 days of cash on hand and 194% cash to long-term debt (including MMC's series 2000 bonds).
INTERIM OPERATING IMPROVEMENT
Despite posting a $16.2 million loss from operations in 2012
(-5.9% operating margin), Fitch believes MMC's operating improvement initiatives are finally beginning to take hold. Through the six month interim period ended June 30th, MMC has generated operating income of $743,000 (0.5% operating margin) on total revenues of $140.4 million compared to a $6.3 million operating loss (-4.6% operating margin) in the prior year period. Fitch notes that the interim 2013 results include a $5.4 million benefit from the Aultman settlement. Excluding the benefit of the settlement, MMC would have posted a $4.7 million loss from operations (-3.4% operating margin); still improved over the year earlier period. Management has identified roughly $11-$20 million of annual cost/ expense savings through revenue cycle and clinical redesign initiatives, of which, approximately $5 million has been implemented. The full benefit of the operational improvement plan is expected to be realized in fiscal 2014.
WEAK DEBT SERVICE COVERAGE
MMC's poor profitability and elevated debt burden result in weak debt service coverage. As calculated under the master trust indenture, MMC produced coverage of the $7.75 maximum annual debt service on the series 2000 bonds of 1.4x in both 2011 and 2012. However, adding capital leases to the series 2000 MADS raises total MADS to $11.25 million. On a consolidated basis (which includes Mercy Professional Care, a for profit physician practice group) MMC generated 0.6x and 0.7x coverage in 2011 and 2012, respectively.
At June 30, 2013, MMC reported a total of $58.4 million of unrestricted cash and investments, which includes the benefit a $12.7 million settlement payment received in June from a lawsuit filed against its main competitor, Aultman Hospital. At June 30th, MMC's unrestricted liquidity equated to 80.7 days cash on hand, a 5.2x cushion(based on MADS of $11.2 million) ratio and 61.0% cash to debt. Fitch notes that MMC's position of unrestricted cash and investments has declined each year since 2009 from $89.4 million at Dec 31, 2009 to $54.3 million at Dec 31, 2012. Without the settlement funds, MMC's unrestricted cash and investment position would have further declined to $45.6 million. The erosion in liquidity reflects, in part, the impact of funding various capital projects including a $14.5 million emergency room expansion from the balance sheet due to MMC's weak profitability.
MMC covenants to provide annual disclosure within 120 days of each fiscal year end, and quarterly disclosure within 45 days of quarter end through the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'NonProfit Hospital and Health Systems Rating Criteria' (May 20, 2013).
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria -- Effective Aug. 12, 2011 to July 23, 2012