CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the following Oklahoma Development Finance Authority bonds issued on behalf of Great Plains Regional Medical Center (GPRMC) as shown:
--$36.3 million hospital revenue bonds, series 2007 to 'BB' from 'BB+'.
The Rating Outlook was revised to Stable from Negative.
The bonds are secured by a pledge of the revenues of the obligated group and a debt service reserve fund.
KEY RATING DRIVERS
LAGGING PROFITABILITY KEY CONCERN: The downgrade to 'BB' from 'BB+' reflects the continued deterioration in GPRMC's operating cash flow, which has remained below-budget the last several years, coupled with no expectation of significant improvement in profitability over the near term. Through Dec. 31, 2013 GPRMC's operating EBITDA margin was a light 5.1%, well below the 9.2% generated through 2013 fiscal year end June 30.
THIN COVERAGE METRICS: The downgrade also reflects GPRMC's very light debt service coverage, which was a weak 1.33x per its indenture calculation for fiscal 2013, and close to its 1.1x rate covenant requirement. Light coverage also reflects GPRMC's significant debt burden, reflected by maximum annual debt service (MADS) equal to a high 8.1% of fiscal 2013 revenues. MADS of $3.3 million occurs in 2014, declining slightly to $3.1 million in 2015 and $2.9 million in 2016 as capital leases term out.
STEADY BALANCE SHEET STRENGTH: GPRMC's balance sheet strength provides solid financial flexibility at the 'BB' rating level. At Dec. 31, 2013, unrestricted cash equaled $21.9 million, or 195.7 days cash on hand (DCOH), 6.7x cushion ratio, and 61.7% cash to debt. Fitch expects liquidity to remain stable.
SENIOR LEADERSHIP TURNOVER: Following several years with interim staff, vacant positions, and the departure of the CEO in 2013, GPRMC placed a full-time CFO and CEO during August 2013 and February 2014, respectively. Fitch believes stability in the leadership team is essential, as continued erosion in clinical activity has required quick strategic action on their part to bring much-needed stability to the organization.
PHYSICIAN RECRUITMENT IS KEY: GPRMC's small revenue base makes it more vulnerable to medical staff and volume volatility, as evidenced by historical performance. Thus the rating is contingent upon management's ability to stabilize operations, via successfully recruiting and retaining sufficient medical staff, at levels which sustain clinical volume and preserve market position.
STEADY COVERAGE NECESSARY: Fitch anticipates fiscal 2014 profitability and coverage to remain in line with fiscal 2013 results, followed by incremental improvement as senior leadership implements its initiatives over the longer term. Weaker than anticipated cash flow and coverage, particularly given already thin coverage levels, would likely result in further downward rating pressure.
GPRMC is a 62-licensed-bed community hospital located in Elk City, Oklahoma, approximately 120 miles west of Oklahoma City. Total revenues were $40.3 million in fiscal 2013.
ONGOING OPERATING STRESS
The downgrade to 'BB' from 'BB+' reflects continued operating pressure at GPRMC at levels well below budgeted expectations. Through the six-month interim period ended Dec. 31, 2013, GPRMC posted a 12.1% operating loss, following a stronger fiscal 2013 year end with a 9% loss. Fitch expects the second half of fiscal 2014 will produce improved performance, and that GPRMC will achieve results in line with prior year.
GPRMC must continue to address its physician staff challenges, which are not atypical for a small rural facility. Currently GPRMC has 60 active medical staff members, and fiscal 2013 was a year of growth. However, ongoing need for family medicine and obstetric coverage has also meant lagging inpatient volumes and revenue. While GPRMC maintained leading inpatient share of 45.4% in 2013, that represents a decline from nearly 50% in 2010 and is indicative of declining volumes and outmigration. Getting the medical staff to full complement and maintaining its stability will continue to be an important credit consideration going forward.
The 'BB' rating also reflects the significant turnover in GPRMC's senior leadership team, which has been largely unstable over the past few years. The new management team has identified key strategies to improve GPRMC's operating performance, including medical staff growth and integration, bringing swing beds back into operation, improving staff productivity, and addressing the revenue cycle process. Fitch believes that stability in the leadership team will be integral to achieving and sustaining operating improvements over the longer term.
THIN COVERAGE MARGIN
Despite solid cash flow equal to a 9.2% operating EBITDA at fiscal 2013, a significant debt service burden meant only 1.1x coverage by same. GPRMC reported 1.33x coverage through fiscal 2013, only slightly above its 1.1x covenant requirement. GPRMC is expecting to finish fiscal 2014 near prior year levels, and the rating could be pressured further if GPRMC falls short of that performance.
Fitch notes that GPRMC's debt is 100% fixed rate, and its debt service requirements will decline slightly over the near term. Currently, MADS is measured at $3.1 million, including approximately $400,000 in capital lease obligations which end in fiscal 2015 and reduce MADS to $2.6 million. No additional debt is planned, and capital needs are expected to remain modest in GPRMC's relatively young 6.1-year average age of plant.
GPRMC's balance sheet consistency remains a key credit consideration, providing some financial flexibility against its weak operating performance. Through Dec. 31, 2013, GPRMC maintained a 6.7x cushion ratio and 61.7% cash to debt. Further, its investments are 100% cash and fixed income, and GPRMC does not have pension or derivative exposure.
GPRMC covenants to disclose annual and quarterly disclosure, which it posts regularly to the Municipal Securities Rulemaking Board's EMMA System. Disclosure has been timely and thorough, with good access to management.
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