CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB+' rating on the following Hospital Authority No. 1 Gage County, Nebraska bonds, issued on behalf of Beatrice Community Hospital (BCH):
--$30 million health care facilities revenue bonds, series 2010B.
BCH also has $13 million in series 2010A bank qualified bonds, which are not rated by Fitch.
The Rating Outlook is Stable.
The bonds are secured by a pledge of gross revenues, a mortgage lien, and a debt service reserve.
KEY RATING DRIVERS
SOLID CASH FLOW: Good volume trends in fiscal 2013 (Sept. 30 year end) and interim 2014 (through the three months ended Dec. 31) have supported healthier cash flow; BCH produced a 4.2% operating and 19.1% operating EBITDA margin in fiscal 2013 which was sufficient to provide 2.9 times (x) coverage of maximum annual debt service (MADS). This trend continued through the interim period with a 15.8% operating EBITDA margin and 2.8x coverage.
MODEST BALANCE SHEET GROWTH: At Sept. 30, 2013, BCH's unrestricted cash and investments equaled $12.3 million (93.7 days of cash on hand [DCOH]) ahead of $7.8 million (69.1 DCOH) at Sept. 30, 2012. Sustained cash flow should provide further incremental balance sheet growth going forward despite an expansion project that is expected to cost $6.6 million and funded from cash flow in fiscal 2015-2016.
CRITICAL ACCESS DESIGNATION: BCH's operating performance continues to be bolstered by the associated supplemental revenues afforded by its critical access hospital (CAH) designation. Further, BCH's rural location affords it with stable and leading market position, and a very limited competitive landscape. While the supplemental revenue provided to BCH helps to mitigate the risks inherent to small, rural facilities, Fitch notes that the CAH program has been a target for reductions at the federal level and changes to this program would likely have a material impact on BCH's rating.
HIGH DEBT BURDEN: BCH maintains a significant debt burden, as evidenced by debt to capitalization of 53.6% and MADS equal to 6.6% of revenue in fiscal 2013. Fitch expects this will moderate over time given good revenue growth and no additional debt plans.
SUSTAINED OPERATING IMPROVEMENT: Fitch expects BCH to maintain healthy operating cash flow levels which support balance sheet growth, and moderating leverage levels over the longer term. Given the risks inherent from BCH's small revenue base, Fitch expects BCH to demonstrate a consistent financial cushion in excess of Fitch's 'BBB' category median ratios before movement back to an investment grade rating level is considered.
BCH is located in Beatrice, Nebraska approximately 40 miles south of Lincoln, Nebraska. BCH is a CAH operating 25 acute-care beds. Other entities include two HUD housing projects and a congregate living facility. Total revenues were $56.2 million in audited fiscal 2013.
STEADY CASH FLOW
Fiscal 2013 was the first full year in the replacement facility (opened February 2012) and BCH benefited from good physician recruitment and clinical growth. Leadership remained committed to growing the medical staff, which increased to 25 active members up from 20 in 2011. BCH's total revenue increased significantly by 20% in fiscal 2013, and management was successful in limiting total expense growth to 18% thus preserving solid profitability. For fiscal 2014, management is budgeting for a steady operating EBITDA margin near 19%, which is reasonable against interim results and prior year performance. The fiscal 2014 budget also includes $1.9 million of meaningful use funds.
Solid cash flow in fiscal 2013 and into 2014 has resulted in some balance sheet growth, to 11.9 million at Dec. 31, 2013 from a low $7.8 million at fiscal year-end 2012. Fitch excludes board designated funds for self-insurance from unrestricted liquidity, which differs from the liquidity covenant calculation. BCH had $13.3 million and 100.9 DCOH per its covenant calculation at fiscal 2013, which includes approximately $952 thousand in board designated funds for health insurance claims.
Further incremental growth is expected in fiscal 2014 and beyond as BCH expects to produce steady operating cash flow and maintain a manageable level of capital spending. Consistent and meaningful balance sheet improvement to levels in excess of Fitch's 'BBB' category medians is a necessary precursor to any consideration of upward rating movement.
HIGH DEBT LEVEL
BCH remains heavily leveraged, and its balance sheet remains light against its debt burden. BCH has $43 million of long-term debt outstanding, which is 100% fixed rate. As of Dec. 31, 2013, BCH had 27.9% cash to debt and a 3.2x cushion ratio, versus Fitch's 'BBB' medians of 91.7% and 10.2x, respectively. Operating in a new facility which opened in early 2012 will limit BCH's capital needs going forward. BCH is planning for up to $1.5 million in capital expenditures for fiscal 2014, well below its annual depreciation expense. While capital plans include a $6.6 million medical office and ambulatory expansion over the next several years, these capital needs should be supported by cash flow with no additional debt expected.
BCH's market position and its CAH designation should provide for some revenue stability over the near-to-medium term, and help to offset the risks associated with its small revenue base. However, Fitch notes that the long term viability of the CAH program is uncertain, and that any changes to that program could have a material impact on BCH's credit profile and rating. Management recognizes the risk associated with the reduction in this supplemental funding and has long term plans to operate on a breakeven basis absent the supplemental funds, which Fitch views favorably.
BCH only covenants to provide audited annual financial statements 150 days after the year-end close to bondholders via the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system (EMMA), which Fitch views negatively. However, BCH provides voluntary quarterly disclosure via EMMA. Disclosure to Fitch has 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