NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued on behalf of Beebe Medical Center (Beebe) by the Delaware Health Facilities Authority:
--Approximately $19.3 million series 2005A.
The Rating Outlook is Stable.
The bonds are secured by a pledge of Beebe's gross receipts and a mortgage on its principal facilities.
KEY RATING DRIVERS
GOOD MARKET POSITION: Beebe enjoys a stable market share in the low 60% range, which is supported by the continued expansion of its ambulatory presence and growth of its Beebe Physician Network (BPN).
2014 INTERIM PERIOD OPERATING LOSS: After generating operating gain of $3.4 million in 2013 (year-end June 30) equal to an operating margin of 1.2%, Beebe reported an operating loss of $2.9 million through March 31, 2014, the third quarter of the current fiscal year. Factors contributing to the loss included an increase in Medicare patients, implementation of a replacement electronic health record (EHR) platform, as well as an increase in expenses related to the growth of the employed physician network.
IMPROVED LIQUIDITY: Liquidity was boosted by the May 2013 release of collateral required by a Letter of Credit bank following the settlement of the Bradley litigation. At March 31, 2014 Beebe reported unrestricted cash of $91.7 million, translating to 118.6 days cash on hand (DCOH), a cushion ratio of 14.2 times (x) and cash equal to 153% of pro forma debt.
MANAGEABLE DEBT LOAD: Beebe's debt load is manageable despite the addition of new money in the 2014 transaction, which only increased MADS by $0.5 million. MADS remains a moderate 2.2% of revenues but MADS coverage by EBITDA at 2.9x through the 2014 interim period is slightly lower than the 'BBB' median of 3.1x.
RETURN TO OPERATING PROFITABILITY: Beebe's return to operating profitability, while maintaining improved liquidity, could result in positive rating pressure.
Beebe Medical Center is a 210 licensed-bed acute hospital located in Lewes, Delaware with $284.3 million of consolidated system operating revenues in fiscal 2013. In addition to the Medical Center, the consolidated system includes a Foundation and the BPN.
GOOD MARKET POSITION
Beebe's inpatient admissions increased by 4.5% in 2013 and inpatient volume continues to be strong through the third quarter of 2014 with a 5.8% increase over the prior year period. The growth is supported by the growth of BPN, as well as the expansion of its ambulatory coverage, particularly in the secondary service area. Beebe responded to the increasing competition for the ambulatory market share by opening three ambulatory locations (Millsboro, Georgetown and Milton) and continued to recruit both primary care physicians, as well as specialists, as reflected in the growth of the BPN, which now employs 57 physicians, up from 38 in 2012.
2014 INTERIM PERIOD OPERATING LOSS
Fiscal 2013 was the first year after the final settlement of the Bradley case and the absence of legal expenses, coupled with good volumes, produced gain from operations of $3.4 million, with operating margin only slightly short of the budgeted 1.5%. A major driver of the operating loss of $2.8 million through the third quarter of 2014 was a shift of the payor mix from commercial to higher Medicare (now 60.7% of gross revenues) as the population ages and retirees move into the area. The shift reduced revenues by approximately $4 million. Additional strains included the ramp up expenses of the new ambulatory centers, and the implementation of the new Cerner EHR, which went live in March 2014. The results also reflect the increase in the loss from the BPN, which increased to $15.2 million through March 31, 2014 as compared to $12.4 million for the entire 2013 year. Beebe is slowing down the recruitment of specialists and at this time plans to only add primary care physicians to the network. Management reported that the subsequent months since the end of the third quarter show stronger results. Management's expectation is that the 2014 fiscal year will end with a loss from operations but one that is somewhat smaller than the third period loss.
RECENTLY COMPLETED TRANSACTION
On June 2, 2014 Beebe closed two direct bank purchase transactions with PNC Bank, N.A. (PNC), for which Fitch was not asked to provide the rating. The variable rate $31 million series 2014A refunded the outstanding series 2002 bonds, which had not been rated by Fitch, and funded $15 million of new money for various small projects and equipment purchases. In recent years capital investment was understandably curtailed pending the outcome of the Bradley litigation. The rate for the 2014A series is 75.5% of one month LIBOR plus 81 basis points. The proceeds of the series 2014B were used to refund the outstanding series 2004A bonds. The initial bank commitment period for both series is for seven years and PNC provided a forward fixed rate lock for the series 2014B at interest rate of 2.016%. Debt service reserve funds were not funded in connection with the 2014 bond issues.
At March 31, 2014 Beebe had $91.7 million of unrestricted cash and investments, an increase from $60.7 million at end of 2012. Liquidity improved due to the release of $18.5 million of collateral in May of 2013. Cash equal to 153% of pro forma debt, including the $15 million of new money in the recent transaction, is better than the 'BBB' category median of 131%, as is the cushion ratio at 14.2x. DCOH at 118.6 days are still lower than the median of 144.7 DCOH.
MANAGEABLE DEBT LOAD
Despite the increase in debt from the new money in the 2014 transactions, Fitch views Beebe's debt load as still moderate. Coverage of MADS by EBITDA was a 3.4x in fiscal 2013, but was lower at 2.9x though the 2014 interim period, though still close to the 'BBB' category median of 3.1x. As pro forma MADS is only slightly higher, MADS as a percent of revenues remains moderate at 2.2%, compared to the 'BBB' category median of 3.5%. Capital plans include the construction of a school of nursing. However, the majority of the approximately $10.3 million cost will be funded from philanthropy, with $8 million already raised and held in restricted donor funds. The remaining $2 million will be funded from internal cash flow over the next 12-18 months.
Beebe covenants to disclose annual audited financial statements and management discussion and analysis as well as quarterly financial statements including balance sheet, income statement, and utilization statistics.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'Nonprofit Hospitals and Health Systems Rating Criteria'(May 20, 2014).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria