Fitch Affirms Cass Regional Medical Center (MO) Revs at 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BBB-' rating on the $46,470,000 revenue bonds, series 2007, issued by Cass County, Missouri on behalf of Cass Regional Medical Center (Cass).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of net revenues (includes funds from county appropriations that is based primarily on a property tax levy) and a bond reserve fund.

KEY RATING DRIVERS

CRITICAL ACCESS DESIGNATION: The achievement of the 'BBB-' rating is due primarily to Cass' critical access hospital (CAH) designation, which helps to mitigate the risks inherent to small rural facilities.

RELATIONSHIP WITH HCA: A long-standing management agreement with HCA (Issuer Default Rating of 'B+'; Outlook Positive by Fitch) brings added strength and stability to the organization. The current agreement runs through 2017.

STEADY PROFITABILITY: Operating margin has consistently exceeded 5% over the last five fiscal years, and was most recently 6.7% in the fiscal year ended (FYE) Dec. 31, 2013 (unaudited results). This includes noncapital appropriations from Cass County, which has been around $1.8 million annually. Similarly, operating EBITDA margins were robust, averaging 17.4% over the last five years.

CONTINUED IMPROVEMENT IN LIQUIDITY: Supported by good profitability and limited capital needs, unrestricted cash and investments improved to $42.2 million at March 31, 2014, more than doubled from $17.3 million at FYE 2009. This positive trend is expected to continue.

SIZABLE DEBT BURDEN: Debt burden remains high for the rating category, with maximum annual debt service (MADS) a high 5.7% of 2013 revenues compared to the 'BBB' median of 3.5%. However, all debt is fixed rate and MADS coverage has been stable at around 3.0x. Debt burden should continue to moderate over the next few years.

RATING SENSITIVITIES

POTENTIAL LEGISLATIVE CHANGES: While currently not expected, material changes to Medicare's CAH program that result in reimbursement pressure could negatively impact the rating.

SMALL REVENUE BASE: Cass's small revenue base of $61.5 million in fiscal 2013 poses inherent credit risks including vulnerability to fluctuations in medical staff size, utilization trends, and payor mix.

CREDIT PROFILE

Cass Regional Medical Center is located in Harrisonville, MO, approximately 37 miles southeast of Kansas City. Cass is a designated critical access hospital with 25 acute care beds and a 10-bed behavioral health unit. Other entities include family practice clinics and several employed clinicians. Total revenues were $61.5 million in 2013.

Stable Operating Platform

Cass has been able to achieve a 'BBB-' rating despite its small revenue base due to its CAH designation, which provides favorable reimbursement rates and some insulation from revenue pressures related to healthcare reform. In addition, Fitch believes the management agreement with HCA adds strength and stability to the organizational profile.

Robust Profitability

Cass posted very strong profitability in fiscal 2013 with operating and operating EBITDA margins of 6.7% and 18.1% compared to the respective 'BBB' medians of 1.8% and 9.0%. Excluding the benefit of the annual appropriation from Cass County, operating and operating EBITDA margins would have been 3.8% and 15.6%, respectively, which still easily exceed the medians. Solid profitability trend continued through the three-month interim period ended March 31, 2014 with operating and operating EBITDA margins of 5.3% and 16.7%, improved from 2.5% and 14.8% in the prior year period. Operating income including noncapital appropriations is budgeted at $3.6 million for fiscal 2014, which Fitch believes is achievable.

Improving Balance Sheet

Steady and consistent liquidity growth has been supported by strong cash flows and limited capital spending. Unrestricted cash and investments totaled $42.2 million at Mar. 31, 2014, a 20.7% increase from one year ago. Days cash on hand of 289.4 and 12.1x cushion ratio exceeded Fitch's 'BBB' medians of 144.7 days and 10.2x. Cash to debt of 88.5% is weaker than the median of 91.7% and reflects the moderately high debt burden.

Cass has one series of fixed rate bonds outstanding in the amount of $47.7 million with a maximum annual debt service (MADS) of $3.5 million. While MADS as a percentage of revenues of 5.7% and debt to EBITDA of 4.1x in 2013 are unfavorable against respective medians of 3.5% and 3.8x, it is considerably improved from 8.1% and 7.1x in 2009. Despite the high debt burden, MADS coverage has been consistent, averaging 3.1x over the last four fiscal years. Cass has no plans for additional debt.

DISCLOSURE

Cass covenants to provide audited financial statements within 150 days after the year-end close and quarterly disclosure within 45 days of quarter close to the municipal securities rulemaking board's EMMA system.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria' (June 3, 2013);
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria'(May 20, 2013).

Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499
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
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Contacts

Fitch Ratings
Primary Analyst:
Jennifer Kim, +1-212-908-0740
Associate Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Emily Wadhwani, +1-312-368-3347
Associate Director
or
Committee Chairperson:
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Jennifer Kim, +1-212-908-0740
Associate Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Emily Wadhwani, +1-312-368-3347
Associate Director
or
Committee Chairperson:
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com