Fitch Affirms Rehoboth McKinley's (NM) 2007A Bonds at 'B'; Outlook Revised to Negative

CHICAGO--()--Fitch Ratings has affirmed the rating on the approximately $5.96 million New Mexico Hospital Equipment Loan Council (Rehoboth McKinley Christian Health Care Services, Inc.) hospital facility improvement and refunding revenue bonds, series 2007A at 'B'.

The Rating Outlook is revised to Negative from Stable.

SECURITY

The bonds are secured by a pledge of revenues and equipment. In addition, there is a debt service reserve fund.

KEY RATING DRIVERS

VOLATILE FINANCIAL PERFORMANCE CONTINUES: Rehoboth McKinley Christian Health Care Services' (Rehoboth) financial performance has historically been very volatile and reflective of the challenges of a hospital with a small revenue base and unfavorable payor mix. The Outlook revision to Negative reflects the continued decline in revenues with current debt service coverage of 0.9x through the 10-month interim period (ended Oct. 31, 2013). Expected year-end audit adjustments should allow Rehoboth to avoid triggering an event of default (less than 1x debt service coverage) for fiscal 2013.

RELIANCE ON SUPPLEMENTAL FUNDING: Rehoboth remains highly reliant on sole community provider (SCP) funds and tax revenue from a mill levy for profitability. The mill levy was increased to four mills from two mills in 2012. Rehoboth will receive three mills for 2014 property tax collections, resulting in an additional $760,000 annually, which will help to offset the decline in SCP funds from a high of $8.6 million in 2010 to about $6 million in fiscal 2013 and 2014. However, these funds are not included in net income available for debt service for debt service coverage calculations.

POOR LIQUIDITY POSITION: At Oct. 31, 2013, Rehoboth had $2.7 million in unrestricted cash and investments, which equates to 19.3 days cash on hand and 33.2% cash to debt. Although improved, the growth in liquidity resulted mostly from a $2.5 million two-year bank loan executed in June 2013. Although Rehoboth remains in violation of its liquidity covenant, the failure to meet its days cash on hand requirement does not result in an event of default.

MANAGEMENT TEAM IN PLACE: Over Fitch's rating history of Rehoboth, there has been significant management turnover. The newest CEO was hired in May 2013 given his merger and acquisition experience and one of his main objectives is to secure a partner for Rehoboth. Several longtime vacant or interim management positions have been filled since the CEO joined including the Chief Nursing Officer, Chief Quality Officer, Chief HR Director and IT Director.

RATING SENSITIVITIES

STRATEGIC AFFILIATION MOVING FORWARD: Rehoboth signed a non-binding letter of intent with University of New Mexico Health System and LHP Hospital Group. Due diligence and legal documentation preparation are expected to be completed by spring 2014 with a final closing in June 2014. Fitch views this relationship favorably as it would help to stabilize operations and the outstanding debt would be defeased as part of the transaction.

CREDIT PROFILE

Rehoboth McKinley Health Care Services, Inc. is a 60-bed general acute care hospital located in Gallup, NM (138 miles west of Albuquerque, NM and 180 miles east of Flagstaff, AZ). Rehoboth changed its fiscal year end in fiscal 2010 to December from August. Total operating revenue in fiscal 2012 was $58.6 million.

VOLATILE FINANCIAL PERFORMANCE DEPENDS ON SUPPLEMENTAL FUNDING

Rehoboth's financial performance has been erratic over the last eight years reflecting its small revenue base, dependence on supplemental funding, and a high rate of management turnover.

In fiscal 2012, Rehoboth generated a $2.3 million of operating EBITDA (4.0%) on total revenues of $58.6 million, which was improved from negative $4.1 million of operating EBITDA (-6.9%) on total revenues of $59.4 million in 2011. Through the 10 months ended Oct. 31, 2013, Rehoboth generated $1.9 million of operating EBITDA (4.2%) on annualized revenues of $53.1 million; slightly behind prior year performance.

Rehoboth continues to experience declining volumes and negative revenue growth. In response, management has implemented various cost control measures including reduction in labor force, implementation of a department-level labor productivity monitoring process and compensation reduction for most physicians. The appointment of a permanent CEO in May 2013 should be positive for the organization and provide better focus and execution going forward. However, supplemental funding in the form of SCP funds and the mill levy are critical, since Rehoboth would be unprofitable without these funds. New Mexico is transitioning the SCP program into the Centennial Care Medicaid Waiver, which is expected to reduce funding from SCP to roughly $6 million annually from $8.4 million in 2012 and $7.1 million in 2011. In November 2012, voters authorized an increase in the property tax levy from two mills to four mills. In July 2013, the McKinley County Commissioners approved applying the increase to 3 mills from 2 mills, which should result in an additional $760,000 of tax revenues to $2.2 million annually.

Rehoboth's debt service coverage calculation excludes tax receipts in its calculation of revenues available. Through the 10-month interim period, coverage of maximum annual debt service (MADS) by EBITDA was weak at 0.9x. Management anticipates about $665,000 in audit adjustments for fiscal 2013 including a pension adjustment and meaningful-use funds. Without these adjustments, it is likely that Rehoboth could have below 1x debt service coverage.

IMPROVING LIQUIDITY

In June 2013, Rehoboth executed a $2.5 million two-year bank loan for working capital needs. At Oct. 31, 2013 Rehoboth had $2.7 million in unrestricted cash and investments; an improvement from $1.7 million at fiscal 2012 year-end. This equates to 19.3 days cash on hand, 3.3x cushion ratio and 33.2% cash to debt. The loan is secured by Rehoboth's tax levy and is required to be repaid on a monthly basis until June 30, 2015. Rehoboth has a liquidity covenant of 25 days in fiscal 2013, which Fitch does not expect it to meet, but failure to do so does not constitute an event of default.

OUTSTANDING DEBT

Total debt outstanding is $8.2 million including $1.8 million outstanding of the $2.5 million series 2013 taxable bonds issued for working capital, $5.9 million series 2007A tax-exempt fixed-rate debt and $279,000 in capital leases. The series 2013 bonds are secured and payable via mill revenues and not included in MADS.

DISCLOSURE

Rehoboth covenants to provide annual financial statements within 30 days after the approval of the report by the state auditor, which has usually resulted in fairly late receipt of audits. Rehoboth has also been posting monthly financial statements on EMMA.

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

Applicable Criteria and Related Research:

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 20, 2013.

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=812129

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Contacts

Fitch Ratings
Primary Analyst
Dana N. Sodikoff, +1 312-368-3215
Associate Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Emily Wong, +1 212-908-0651
Senior Director
or
Committee Chairperson
Jim LeBuhn, +1 312-368-2059
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Dana N. Sodikoff, +1 312-368-3215
Associate Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Emily Wong, +1 212-908-0651
Senior Director
or
Committee Chairperson
Jim LeBuhn, +1 312-368-2059
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com