NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB+' rating on the following revenue bonds issued by the Maryland Health and Higher Educational Facilities Authority issued on behalf of Doctors Community Hospital (DCH):
--$82,370,000 fixed rate bonds, series 2010;
--$63,600,000 fixed rate bonds, series 2007A.
The Rating Outlook is Stable.
The bonds are secured by a pledge of all receipts, a mortgage on the hospital, and a debt service reserve fund.
KEY RATING DRIVERS
INCREASED OPERATIONAL STABILITY EXPECTED: Under the Maryland Global Budget Revenue (GBR) program, DCH began receiving fixed hospital revenues beginning July 1, 2013. Fitch believes the predictable revenue stream under the GBR program should provide much needed operational and financial stability to DCH, especially since DCH had been challenged by a trend of volume declines.
2014 INTERIM RESULTS INDICATE IMPROVEMENT: Following three consecutive years of profitability declines to a negative 1.5% in fiscal 2013, profitability improved to 0.8% through the nine-month interim period ended March 31, 2014. Management projects to end the fiscal year with an operating margin around 1% and expects the positive trend to continue.
WEAK LIQUIDITY: Liquidity metrics are very weak and continue to be a key credit concern. However, given expected improvement in cash flow and manageable capital plans, unrestricted cash and investments should grow in the near to medium term.
LOW BUT STABLE DEBT SERVICE COVERAGE: Maximum annual debt service (MADS) coverage by operating EBITDA was relatively stable at 1.5x in fiscal 2013 and at 2.1x for the nine month interim period.
ABILITY TO MANAGE GBR: While DCH is expected to benefit from improved operational and financial stability under the GBR program, a return to investment grade rating will be dependent on the demonstrated ability to improve operating performance and cash flow to build liquidity.
DCH is a 219 licensed bed hospital located in Lanham, MD, a suburb of Washington D.C. Fitch's analysis is based on Doctors Community Hospital and Subsidiaries, which generated $195.7 million in total operating revenues in fiscal 2013 (June 30 fiscal year end). The obligated group is the hospital only and accounted for over 100% of total assets and 91% of total revenue of the entire entity in 2013.
Maryland Global Budget Revenue Program
The affirmation of the 'BB+' rating and Stable Outlook reflects participation in the GBR program that the State of Maryland implemented under the state's Medicare Waiver. The GBR program was introduced in 2013, offering participants a fixed revenue stream designed to reimburse hospitals for managing care in the most appropriate cost setting. The amount of hospital revenue is known before the start of the fiscal year and is adjusted annually. As one of the first participants, DCH began receiving a fixed revenue base beginning July 1, 2013 based on factors including service area demographics, utilization trends, and market position. For fiscal 2014, the hospital's gross revenue will total $221 million (before contractual adjustments). For fiscal 2015, DCH is budgeting for a 2% increase compared to the State's initial proposed increase of 2.41%.
Although the program is in its early, evolving stages and certain details are still being worked out, Fitch believes it provides DCH with much needed operational stability, particularly given that the recent financial deterioration was largely driven by an eroding revenue base. Operating margin was 1.4%, 0.2%, and negative 1.5% in fiscal 2011, 2012, and 2013, respectively, but improved to 0.8% through the nine month interim period. The reversal in trend is expected to be sustained. With this change in reimbursement structure, DCH has implemented a daily scorecard that measures its performance on indicators such as average length of stay, readmissions, emergency room encounters, and patient origin. Various initiatives are also in place to reduce expenditures throughout the organization. Fitch believes this development heightens reliance on management's ability to implement care coordination and direct patient volume to be received in appropriate settings. Management expects to exceed the budgeted net income of $400,000 in fiscal 2014.
Following significant capital investments made through 2010, DCH's capital plans remain manageable for the foreseeable future. Operating room renovations are on the horizon and estimated to cost approximately $13.4 million over fiscal 2014 and 2015, but will mostly be funded by remaining bond proceeds from prior issuances. Routine capital is budgeted at $3 million-$5 million annually, compared to depreciation levels at around $10 million.
One of Fitch's main credit concerns is DCH's weak liquidity position, which has steadily declined over several years and remains unfavorable within the 'BB' rating category and other Maryland issuers under the all-payor rate system. Unrestricted cash and investments totaled $38.6 million at March 31, 2014, equating to 72.8 days cash on hand, 3.5x cushion ratio, and 25.9% cash to debt. While equity spend for capital needs is expected to remain manageable, Fitch believes current liquidity levels provide limited cushion from operating variability. Liquidity growth would be key in returning to an investment grade rating.
High Debt Burden
As of March 31, 2014, long-term debt totaled $148.9 million, generating MADS of $10.9 million. Debt burden is high as measured by MADS as a percentage of revenue of 5.6% and 9.1x debt to EBITDA in fiscal 2013 compared to the below investment grade medians of 3.1% and 5.7x. However, supporting the high debt burden is a stable MADS coverage that has averaged 1.6x over the last four fiscal years. Additionally, MADS coverage by the obligated group, as calculated under the bond documents, was slightly stronger at 1.8x in fiscal 2013. All debt is fixed and there are no swaps outstanding.
DCH covenants to provide quarterly financial information 45 days after quarter end and annual financial information within 120 days of fiscal year end via 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 30, 2014.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria