Fitch Affirms Boone Hospital Center's (MO) Outstanding Bonds at 'A'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'A' rating on the following bonds issued by Boone County (MO) on behalf of Boone Hospital Center (BHC):

--$10,360,000 hospital refunding revenue bonds, series 2012;

--$88,130,000 hospital revenue bonds, series 2008;

--$4,415,000 hospital revenue bonds, series 2004.

The Rating Outlook is Stable.

KEY RATING DRIVERS:

SOLID FINANCIAL PROFILE: BHC's credit profile is characterized by strong operating cash flow, a moderate debt burden, solid debt service coverage and liquidity metrics that are consistent with the 'A' rating category.

AFFILIATION WITH BJC: BHC maintains a strong affiliation with BJC Health System (BJC) through which it benefits from BJC's managerial expertise and strategic support.

LEASE STRUCTURE RISK: The hospital is leased by the Board of Trustees of Boone County Hospital (BOT) to CH Allied Services (CHAS), a member of BJC. The lease does not extend through the maturity of the bonds, which Fitch views as a credit risk. The current term of the lease is through 2020 with automatic five year renewal periods.

FAVORABLE SERVICE AREA CHARACTERISTICS: BHC maintains a strong market share in a service area which features a stable and diverse economy with low unemployment.

RATING SENSITIVITIES

CONSISTENT OPERATING CASH FLOW AND COVERAGE: Fitch expects that BHC's operating cash flows will continue to provide for maximum annual debt service (MADS) coverage at levels consistent with Fitch's 'A' category medians.

SECURITY:

The bonds are secured by a pledge of the net income and revenues derived and collected by BOT (obligor on the bonds) from the operation of the hospital facilities. During the term of the lease, the bonds are not payable from the hospital's net revenues, but from the lease payments received by BOT from BHC. The bonds are additionally secured by a debt service reserve fund maintained by the BOT.

CREDIT SUMMARY:

BHC is a 397 licensed bed (360 staffed beds) regional medical center owned by BOT and leased to a subsidiary of BJC. BHC serves as a regional referral center across 26 mid-Missouri counties. Total operating revenues equaled approximately $297.6 million in fiscal 2013.

Fitch analyzed the individual financial statements of BHC and BOT and also combined the statements to gain a consolidated view of the lease structure. All numbers referenced in this report are based upon the combined financials of BHC and BOT.

SOLID FINANCIAL PROFILE

BHC's operating profitability has been historically robust. Operating performance remains strong for the rating category but has compressed from historical levels. Net patient revenue decreased $10 million in fiscal 2013 due to a $6 million RAC reserve as well as the negative impacts of sequestration cuts ($2 million) and SGR-related cuts ($800k). The remainder of the decrease was due to an ongoing shift from inpatient to outpatient services that is consistent with national trends. As a result, operating EBITDA margin decreased to 11.8% from 14.4% in fiscal 2012, but remains favorable relative to Fitch's 'A' category median of 10.7%. Operating EBITDA margin improved in the three month interim period ending March 31, 2014 (the interim period) to 13.1%. Fitch notes that BHC's operating margin is negatively impacted by accelerated depreciation related to BHC's lease agreement.

BHC's debt burden remains moderate with MADS equal to 3.4% of operating revenues in fiscal 2013. Despite the lower profitability levels in fiscal 2013 and the interim period, MADS coverage by operating EBITDA of 3.5x and 3.7x, respectively, remains consistent with Fitch's 'A' category median of 3.4x. MADS is expected to decrease from $10 million to approximately $7.15 million in 2016, further strengthening coverage.

Unrestricted cash and investments remained stable with $135 million at March 31, 2014. Liquidity metrics of 197.8 days cash on hand, 13.5x cushion ratio and 131.3% cash to debt are consistent with Fitch's 'A' category medians of 196.3 days, 15.6x and 129.2%. BOT is embarking on construction of a new medical plaza. The final scope and cost of the project is flexible and to be determined, but future liquidity growth may be somewhat limited by the project. Fitch will assess any impact on the combined credit profile as details become more certain.

AFFILIATION WITH BJC

Fitch views BHC's strong affiliation with BJC as a primary credit strength. The hospital is owned by BOT and leased to CHAS, a subsidiary of BJC. CHAS is included in BJC's consolidated financial statements and BHC's CEO is an employee of BJC. BHC benefits from BJC's managerial expertise and strategic support.

LEASE STRUCTURE RISK

The hospital lease does not extend through the maturity of the bonds, which Fitch views as a credit risk. Fitch's analysis is based on the expectation that the lease is continually renewed through the maturity of the bonds.

The lease was renewed and amended in June 2012 with an extended term through 2020 and with automatic five year renewal periods thereafter. Either party can terminate the lease by providing written notice of its intent not to renew two years from the then current expiration date. Therefore, the lease will effectively be renewed in 2018.

Under the terms of the lease, debt service is funded through lease payments by BHC to BOT. Debt service is defined to equal $10 million through 2015 after which the lease payment will equal actual debt service due. Additionally, the lease includes a cash split of the increase in cash at BHC with 50% retained at BHC, 25% distributed to BOT and 25% distributed to CHAS. In the event that the hospital's revenues are insufficient to make the lease payment, BOT shall be responsible for 75% of the shortfall while CHAS shall be responsible for 25%. BOT may use the hospital reinvestment fund (board designated funds for capital improvements) to pay up to 50% of the shortfall.

FAVORABLE SERVICE AREA CHARACTERISTICS

BHC's operating performance is bolstered by a strong market share in a stable service area. BHC is located in Columbia, Missouri (rated 'AA' by Fitch) which features a growing and diverse economic base anchored by the main campus of the University of Missouri. BHC holds a 21.1% market share in its 26 county total service area while University of Missouri Health Care holds a competitive 20.5% share. The total service area accounts for over 90% of BHC's inpatient discharges.

DISCLOSURE

BHC covenants to disclose audited financial statements within 180 days of the end of the fiscal year and voluntarily discloses quarterly financial statements on the Municipal Securities Rulemaking Board's EMMA website.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria',

(May 30, 2014).

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836274

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Contacts

Fitch Ratings
Primary Analyst
Adam Kates
Director
+1-312-368-3180
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Emily Wong
Senior Director
+1-415-732-5620
or
Committee Chairperson
Eva Thein
Senior Director
+1-212-908-0674
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Adam Kates
Director
+1-312-368-3180
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Emily Wong
Senior Director
+1-415-732-5620
or
Committee Chairperson
Eva Thein
Senior Director
+1-212-908-0674
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com