CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following DeKalb County Hospital Authority bonds issued on behalf of DeKalb Medical Center (DeKalb), at 'BBB':
--$180.7 million series 2010;
The Rating Outlook remains Negative.
Additionally, Fitch Ratings has withdrawn its ratings for the following DeKalb County Hospital Authority (GA) bond due to pre-refunding activity:
--Revenue anticipation certificates series 2003A (all maturities).
The bonds are secured by a gross revenue pledge, a leasehold mortgage, and a fully-funded debt service reserve fund.
KEY RATING DRIVERS
WEAK OPERATING RESULTS: The Negative Outlook reflects DeKalb's lagging profitability below Fitch's expectations and below budgeted levels in fiscal 2013, countered with slight improvement in the interim period. DeKalb produced a weak 2.3% EBITDA margin in fiscal 2013 (June 30 year-end) which improved to 4.3% through the six-month interim period ended Dec. 31, 2013. Further improvement is expected as strategic efficiency and cost-cutting initiatives yield results in 2014.
STEADY BALANCE SHEET: DeKalb's liquidity is healthy at 139.6 days of cash on hand (DCOH) and 11.9x cushion ratio as of Dec. 31, 2013, and should be further bolstered by revenue cycle improvements underway. Additionally, DeKalb's frozen defined benefit pension plan is currently funded at over 106% which should reduce its impact to cash flow.
SOLID MARKET POSITION: The rating reflects DeKalb's steady market position within the competitive and dynamic metropolitan Atlanta service area. It garnered 35.5% inpatient share in 2013 within a 15-minute 'drive zone' DeKalb identifies as its primary service area, ahead of 33.1% in 2009.
MANAGEABLE CAPITAL NEEDS: DeKalb is planning for $20 - $30 million in annual capital spend going forward, just ahead of 100% of depreciation and funded via cash flow. Fitch believes this level of spending is manageable, but necessary given DeKalb's elevated average age of plant of 18.8 years and its competitive service area.
NEED FOR PROFITABILITY IMPROVEMENT: DeKalb will need to produce better operating results in the second half of the year to meet its fiscal 2014 projections, which call for a $10.9 million operating loss and a 5.6% operating EBITDA margin. A failure to produce better than current levels of operating EBITDA and coverage metrics within the next 12 months would result in negative rating action.
DeKalb is a nonprofit integrated regional healthcare system operating in east metropolitan Atlanta, consisting of a 451-bed acute care hospital in North Decatur, a 100-bed acute care hospital in Hillandale, and a 76-bed long-term acute care facility in downtown Decatur. As of fiscal year ended June 30, 2013 DeKalb generated approximately $414.6 million in total revenue.
The obligated group (OG) includes 451-bed DeKalb North Decatur, 100-bed DeKalb Hillandale, the DeKalb Medical Physician Network, and DeKalb Regional Health System as corporate parent. In fiscal 2013, the OG contributed 96.5% of total assets and 95.7% of total revenues of the consolidated entity.
The Negative Outlook reflects DeKalb's weak operating profitability, which was weaker than expected for fiscal 2013 and will need to improve in order for DeKalb to make its fiscal 2014 projected results. Management's key strategic initiatives include better care management, reduced labor costs, revenue cycle, and primary care market growth, which are expected to yield $10-$19 million in positive net impact over the next two years. A failure to demonstrate continued improvement in operating cash flow, particularly operating EBITDA, above the 4.3% generated through Dec 31, 2013 would result in negative rating action.
Despite consistent growth in revenue, DeKalb's expense base growth continues to outpace it as demonstrated by continued operating losses through Dec. 31, 2013. DeKalb produced a negative 3.8% operating margin though the interim period, improved over the negative 6.5% operating margin for fiscal 2013. This resulted in a 6.5% EBITDA margin (ahead of 4.2% for fiscal 2013) and 2.1x coverage of maximum annual debt service by EBITDA. DeKalb is projecting for an 8.3% EBITDA margin for fiscal 2014, which would produce 2.7x MADS coverage, and further improvements in 2015.
STABLE BALANCE SHEET
Fitch believes DeKalb's liquidity and capital structure should remain steady going forward, as evidenced by consistent liquidity metrics against a reduced pension liability and defeasance of approximately $2.9 million in series 2003A fixed rate bonds in September 2013. Additionally, DeKalb's ongoing capital needs are manageable so long as it sustains or improves its operating performance as a funding source for expenditures. No additional debt is currently planned.
With the series 2003A defeasance, DeKalb has approximately $180.7 million in fixed rate debt outstanding. MADS is equal to $14.1 million, and debt service is level. DeKalb produced 1.74x coverage and had 145 DCOH per its covenant calculations at Dec. 31, 2013, versus the 1.3x coverage and 150 DCOH calculated at June 30, 2013. DeKalb is counterparty to two basis swaps with a $3.4 million mark-to-market as of Dec. 31 2013 requiring $3.3 million in posted collateral.
DeKalb covenants to provide annual disclosure no later than 120 days after the end of each fiscal year, and quarterly disclosure no later than 45 days after the first three quarters and 60 days after the fourth quarter, to the Municipal Securities Rulemaking Board's EMMA system. Disclosure includes a detailed management discussion and analysis, which Fitch notes is best practice. Overall, DeKalb's disclosure and access to management have been timely and thorough.
Additional information is available at www.fitchratings.com.
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