NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on approximately $15.3 million of Hannibal Industrial Development Authority (MO) series 2006 revenue bonds issued on behalf of Hannibal Regional Hospital (Hannibal).
The Rating Outlook is Stable.
Debt payments are secured by a pledge of the gross revenues of the obligated group, a mortgage and a fully funded debt service fund.
KEY RATING DRIVERS
SOLID LIQUIDITY: Hannibal's balance sheet metrics have continued to improve since fiscal 2009 with $54.7 million of unrestricted cash and investments at Dec. 31, 2013, equating to a solid 189.9 days cash on hand, 13.0x cushion ratio and 263.8% cash to debt.
DECLINING MARKET SHARE: Hannibal has experienced a decline in inpatient market share over the last few years, falling to 40.1% in fiscal 2012 from 44% in fiscal 2010. Management is continuing to work to regain lost share.
SATISFACTORY OPERATING PERFORMANCE: Hannibal's historical operating profitability remains sound, generating operating EBITDA margins of 9.1%, 12.8% and 10.7% in fiscal 2011, 2012 and 2013, respectively and is consistent with the rating. The compression in fiscal 2013 primarily reflects a $2.3 million reserve against Medicaid disproportionate share hospital (DSH) revenue received in fiscal 2013.
REDUCED DEBT BURDEN: Maximum annual debt service (MADS) decreased 24% in fiscal 2014 due to the redemption of Hannibal's series 2010 bonds. MADS decreased to 3.7% of total revenues in fiscal 2013 from 4.9%, allowing MADS coverage by EBITDA to remain solid at 3.3x in fiscal 2013 despite the compression in operating profitability.
STRONG RELATIONSHIP WITH CLINIC: Hannibal has a strong relationship with Hannibal Clinic, a large multi-specialty physician group, which accounts for over 70% of its admissions.
WEAK PAYOR MIX: Hannibal's exposure to government payors (approximately 63.9% of gross revenues in fiscal 2013) coupled with a relatively small revenue base ($112.5 million in total revenue in fiscal 2013) is a concern as governmental reimbursement reductions or operational issues could have a significant impact on financial performance.
DEBT COVERAGE MAINTENANCE: Fitch expects Hannibal to sustain current MADS coverage levels consistent with the rating category. Material compression of coverage due to either decreased operating profitability or issuance of additional debt could pressure the rating.
DECLINE IN MARKET SHARE: Fitch is concerned that the continuing decline in market share could pressure operating profitability given Hannibal's small revenue base. Rating pressure is likely if the declining market share begins to materially compress operating profitability.
Hannibal operates a 105-bed community hospital based in Hannibal, MO located in northeast Missouri approximately 120 miles north of St. Louis. Total operating revenue in fiscal 2013 was $112.5 million. Hannibal covenants to provide annual continuing disclosure no later than 150 days after the end of fiscal year and quarterly disclosure no later than 60 days after each quarter's end. The obligated group is the system, which includes the hospital and foundations. Annual disclosure is posted to the Municipal Securities Rulemaking Board's EMMA system and includes audited financial statements, payor mix, and utilization statistics. Hannibal does not post quarterly disclosure to the EMMA, which Fitch views negatively.
Hannibal's balance continues to strengthen after a material drop in liquidity in 2009 due to increased capital investments and investment losses due to significant equity exposure. Unrestricted cash and investments have increased 56% since fiscal year end 2011 to $54.7 million at Dec. 31, 2013. Hannibal managed to increase its unrestricted liquidity despite the cash redemption of its series 2010 bonds in the interim period ending Dec. 31, 2013 (the interim period). Unrestricted liquidity equates to 189.9 days cash on hand, 13x cushion ratio and 263.8% cash to debt and are solid relative to Fitch's 'BBB' category medians of 144.7 days, 10.2x and 91.7%. The improving strength of Hannibal's balance sheet provides some financial cushion for the recent deterioration in profitability at Hannibal.
DECLINING MARKET SHARE
Although Hannibal continues to have a leading inpatient market share in its primary service area of 40.1% in fiscal 2012, the decline in market share from 44% in 2010 is a concern. Hannibal attributes the loss in market share mostly to University of Missouri, Columbia for higher acuity services and slow throughput in its emergency department. In an effort to regain market share, management is increasing its recruitment efforts and have recently improved emergency department efficiencies by hiring a new department director and a more permanent physician base.
Hannibal also started a new stroke program in fiscal year (FY) 2013, which management believes will help to regain lost market share and improve volumes by retaining stroke patients, who previously had been stabilized at Hannibal and then immediately transferred elsewhere. While Fitch is concerned about declining volumes and market share, Fitch views these proactive efforts to address the shift in market share positively.
SATISFACTORY OPERATING PERFORMANCE
Operating EBITDA has remained relatively consistent over the last five years, averaging 11.8% between FYs 2009 and 2013. Operating EBITDA margin decreased from 12.8% in fiscal 2012 to 10.7% in fiscal 2013 primarily due to a $2.3 million decrease in supplemental government funding. Despite the decrease, profitability remains consistent with the rating. The decrease in supplemental funding was anticipated by management and was primarily due to increased reserves for Medicaid DSH revenue received but not recorded in fiscal 2013. Excluding the Medicaid DSH reserve, operating EBITDA margin would have equaled 12.5%. Operating performance remained consistent despite declining inpatient volumes and increased expenses associated with implementation of a new electronic health record system. Hannibal's fiscal 2014 budget includes an operating EBITDA margin target of 11.9% which Fitch views as reasonble, given historical performance.
REDUCED DEBT BURDEN
Hannibal's debt burden decreased materially in fiscal 2014 due to the redemption of its series 2010 bonds in the interim period. MADS decreased approximately 24% from $5.5 million to $4.2 million. MADS as a percent of fiscal 2013 revenues decreased to 3.7% from 4.9% and is now in line with Fitch's 'BBB' category median of 3.5%. Despite the decrease in profitability, MADS coverage by EBITDA remained solid at 3.3x and is in line with Fitch's 'BBB' category median of 3.1x.
STRONG RELATIONSHIP WITH CLINIC
Hannibal remains dependent on Hannibal Clinic as they account for 70% of Hannibal's admissions. However, management indicates that they maintain a strong working relationship. There are more than 50 admitting physicians in the Hannibal Clinic and they are primarily loyal to Hannibal as 90% of their admissions are sent to Hannibal.
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Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 20, 2013).
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria