Fitch Affirms Marshall Medical Center (CA) Revs at 'BB+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the underlying 'BB+' rating on the following California Health Facilities Financing Authority bonds, issued on behalf of Marshall Medical Center (MMC):

--$29.3 million series 2004A (insured: Cal-Mortgage Loan Insurance Division);

--$20 million series 2004B (insured: Ambac Assurance Corporation).

The Rating Outlook is Stable.

MMC has an additional $17.3 million in series 2012A bonds (insured: Cal-Mortgage Loan Insurance Division) that has an insured rating only, which Fitch rates 'A' with a Stable Outlook.

SECURITY

Debt payments are secured by a pledge of the gross revenues of the obligated group and a mortgage lien.

KEY RATING DRIVERS

IMPROVED PROFITABILITY WITH GROWTH: The affirmation at 'BB+' reflects improved cash flow in fiscal 2013 (Oct. 31 year end) following the opening of the three-story expansion in early 2012, which helped provide good volume growth and associated revenues. MMC's operating EBITDA margin improved to 8% in fiscal 2013 (draft audit) ahead of 6% in fiscal 2012.

LESS RELIANCE ON PROVIDER FEE: MMC reported $5.5 million in operating income in FY 2013, including $6.9 million in net California provider fee benefit. Absent this, MMC would have recorded an operating loss of $1.3 million (negative 0.6% operating margin), reflecting less reliance on the provider fee than in prior years. Fitch notes that a three-year extension of the provider fee program has passed state legislation and is awaiting CMS approval. MMC does not include any provider fee benefit in its budgeting process and the 2014 budget reflects breakeven operating performance, which Fitch believes is achievable.

LIQUIDITY REMAINS LIGHT: As of Oct. 31, 2013, MMC had $29.9 million in unrestricted cash and investments, equal to a light 55.1 days of cash on hand, 5.4x cushion ratio, and 41.1% cash to debt. MMC's liquidity deteriorated due to the equity contribution for the completion its expansion project and Fitch expects stability to modest growth going forward as MMC's cash flow should exceed more modest capital needs going forward.

MANAGEABLE FUTURE CAPITAL NEEDS: MMC's five-year capital budget (2014-2018) totals $48.6 million, starting with $13.7 million budgeted for 2014 and declining thereafter. Fitch expects MMC will generate more than sufficient cash flow to support its capital needs, as well as provide incremental balance sheet replenishment over the longer term.

RATING SENSITIVITIES

SUSTAINED OPERATING RESULTS: Fitch expects MMC to realize the full benefits of its cost control initiatives and expansion project to achieve break-even profitability (excluding provider fee benefit) in 2014. Additionally, Fitch expects this level of cash flow to begin to rebuild its balance sheet as future capital needs are manageable.

CREDIT PROFILE

Marshall Medical Center (MMC) is located in Placerville, California approximately 45 miles east of Sacramento, and operates a 113 bed general acute-care community hospital and several clinics. In fiscal 2013 (draft audit), MMC generated $213.6 million in total operating revenue.

STEADIER CORE OPERATIONS

Following the opening of its 3-story expansion, MMC was able to stabilize its operating margin at 2.6% in fiscal 2013, despite an increase in depreciation and other operating expenses. Additionally, MMC is demonstrating reduced reliance on the net benefit from the provider fee program, which equaled $6.9 million in 2013.

Significant work on lean operations coupled with good clinical volume growth supported better profitability in fiscal 2013, and should support sustained cash flow going forward. MMC's inpatient volumes increased 3% in 2013, while attention to operating efficiency reduced inpatient length of stay to 4.4 days from 4.8 days in 2012. Without significant reductions in force, MMC held its personnel costs largely flat in 2013 from prior year, against a 3% increase in total revenues. Fitch also notes that MMC's strong market position as the only acute care provider in its service area should help support sustained performance going forward.

BALANCE SHEET STRESS

MMC has light liquidity, with metrics reflective of the below-investment-grade rating. At Oct. 31 2013, MMC had $29.9 million in unrestricted cash, against $72.7 million in total long term debt. MMC's debt includes $29.3 million in series 2004A fixed rate bonds, $20 million in series 2004B auction rate bonds, $17.3 million in series 2012A fixed rate bonds, and $4 million in capital leases.

MADS is calculated at $5.5 million, which MMC covered at 3.1x by operating EBITDA in fiscal 2013. Debt service is not level due to staggered capital lease payments, and will decline slightly in 2016 to $4.5 million, until increasing to $5.4 million in 2023 as the series 2004B bonds begin to amortize.

Fitch notes that sustained cash flow in excess of expected capital demands over the next three to five years should allow for balance sheet preservation at a minimum. In addition, the recent state extension of the provider fee program for another three years (through Dec. 2016), should net MMC $21 million if approved by CMS. Capital expenditures are budgeted to equal $13.7 million in fiscal 2014 and fall year-over-year thereafter. Sustained cash flow results ($17 million operating EBITDA in fiscal 2013) should provide incremental balance sheet growth over time now that MMC's capital demands are reduced.

Disclosure

MMC provides quarterly and annual disclosure via the Municipal Securities Rulemaking Board's EMMA System. Annual disclosure is provided within 120 days of fiscal year end; quarterly disclosure is provided within 45 days of the first three quarters and 60 days for the last quarter.

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=821139

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Contacts

Fitch Ratings
Primary Analyst
Emily E. Wadhwani, +1-312-368-3347
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago IL 60602
or
Secondary Analyst
Emily Wong, +1-212-908-0555
Senior Director
or
Committee Chairperson
Eva Thein, +1-212-908-0674
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Emily E. Wadhwani, +1-312-368-3347
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago IL 60602
or
Secondary Analyst
Emily Wong, +1-212-908-0555
Senior Director
or
Committee Chairperson
Eva Thein, +1-212-908-0674
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com