Fitch Downgrades Halifax Health's (Florida) Revs to 'BBB'; on Rating Watch Negative

NEW YORK--()--Fitch Ratings has downgraded the rating on the following bonds issued by the Halifax Hospital Medical Center (Daytona Beach, FL), issued on behalf of Halifax Health (Halifax) to 'BBB' from 'BBB+'.

--$175 million series 2006A

--$104 million series 2006B-1 & 2006B-2

--$70 million series 2008

In addition, Fitch has placed the bonds on Rating Watch Negative. The Negative Rating Watch reflects concern should Halifax fail to obtain waiver agreements related to an impending debt service coverage covenant violation during fiscal 2014. This could trigger an event of default and then accelerate payment on the organization's outstanding debt. Fitch expects to resolve the Rating Watch in the next few months when an outcome regarding waiver obtainment is made clear.

The rating on the series 2008 bonds is an underlying rating as the bonds are supported by a direct pay letter of credit (LOC) from JPMorgan Chase Bank (rated 'A+/F1' with a Stable Outlook by Fitch).

SECURITY

The bonds are secured by a pledge of net revenues, property, and all other collateral held by or pledged to the master trustee excluding ad valorem tax revenue. The series 2008 bonds are additionally secured by the LOC.

KEY RATING DRIVERS

UNRESTRICTED LIQUIDITY DECLINE: The rating downgrade to 'BBB' reflects the reduction in liquidity due to the recent settlement between Halifax Health and the U.S. Department of Justice regarding Federal Stark Law and False Claims Act allegations. Within the agreement, Halifax has agreed to pay the United States $85 million, which management plans to pay in full on March 14, 2014. Halifax's reduced unrestricted liquidity position combined with modest levels of profitability and elevated leverage brings its overall financial profile to a level more commensurate with the 'BBB' rating level.

FINANCIAL COVENANT VIOLATION: Management believes the settlement payment will cause the organization to be in violation of its debt service coverage covenant, which Fitch views negatively. Specifically, Fitch expects maximum annual debt service coverage to fall below 1x. This includes the $85 million as an operating expense, which is an event of default under the various bond documents. Although Fitch believes it unlikely, declaration of an event of default is possible should Halifax not be able to obtain necessary waivers related to the financial covenant violation. Management expects to obtain waivers by the middle of May 2014, which Fitch views as manageable.

RATING SENSITIVITIES

ABILITY TO OBTAIN WAIVER AGREEMENT: Fitch expects to resolve the Negative Rating Watch once Halifax's March 31, 2014 disclosure documents are made public by mid-May, which should also coincide with resolution on covenant violation waivers. This should provide Fitch with more clarity regarding Halifax's financial position going forward.

CREDIT PROFILE

Halifax is located in Daytona Beach, FL and is anchored by its flagship tertiary facility, Halifax Medical Center and an 80-bed acute care hospital in Port Orange. In fiscal 2013, Halifax had $476.9 million in total revenue (includes tax revenue). Halifax covenants to submit certain annual financial and utilization information to the MSRB's EMMA system.

CORPORATE INTEGRITY AGREEMENT

As part of the settlement agreement, Halifax will operate under a CIA for five years as its function is intended to provide oversight of all physician contracts and assurance that Halifax will meet all Federal laws, rules, and regulations.

PENDING LITIGATION

Fitch is also monitoring Halifax's involvement in a second lawsuit over related allegations regarding medical necessity, which is scheduled to begin trial in July 2014. Fitch believes the associate legal costs or a negative outcome could further impact the organization's financial profile.

DEBT PROFILE

Halifax's total outstanding debt was $352.2 million as of Sept. 30, 2013, consisting of 81% fixed-rate and 19% variable-rate. The organization has one outstanding swap with a notional amount of $70 million. As of Jan 31, 2014, the mark to market value of the swap was negative $19.9 million. Citigroup (rated 'A/F1' by Fitch) is the swap counterparty and there is no collateral posting requirement.

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=824102

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Contacts

Fitch Ratings
Primary Analyst
Michael Burger, +1-212-908-0555
Director
Fitch Ratings Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Emily Wadhwani, +1-312-368-3347
Director
or
Committee Chairperson
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Michael Burger, +1-212-908-0555
Director
Fitch Ratings Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Emily Wadhwani, +1-312-368-3347
Director
or
Committee Chairperson
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com