SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A+' rating on approximately $22 million in series 2012 revenue bonds issued by the Mt. Lebanon Hospital Authority (Allegheny County, Pennsylvania) on behalf of St. Clair Hospital (SCH).
The Rating Outlook has been revised to Positive from Stable.
SECURITY
The bonds are secured by a pledge of gross revenues.
KEY RATING DRIVERS
STRONG FINANCIAL PERFORMANCE IN COMPETITIVE MARKET: The revision in the Outlook to positive reflects SCH's continued strong financial performance and market share growth in a competitive service area. SCH's financial profile is highlighted by healthy profitability and robust debt service coverage. The hospital's unrestricted liquidity position has improved and Fitch believes that this trend should continue due to sustained strong operating cash flow and manageable capital plans over the next two to three years. Further liquidity growth may lead to positive rating pressure over the next 24 months, as additional balance sheet cushion is necessary to serve as a mitigant against potential operating volatility associated with SCH's status as a single-site hospital in a competitive market.
LEADING MARKET POSITION: The hospital's inpatient market share has grown in each of its six defined regions in southwestern Allegheny County and northern Washington County, with specific increases ranging from 8% to 60% between fiscals 2006 and 2013. However, the greater service area remains competitive with the presence of two large tertiary providers in Pittsburgh, located only six miles away.
SOLID UTILIZATION GROWTH: Led by a strong relationship with its medical staff, SCH continues to see good volume growth in nearly every utilization category, which is contrary to regional trends.
EFFECTIVE MANAGEMENT PRACTICES: Implemented throughput measures, revenue cycle enhancements, cost containment initiatives, and solid employee relations has helped build and support the overall financial profile improvement.
LOW DEBT BURDEN: Maximum annual debt service (MADS) of $4.1 million represented a low 1.5% of total revenue for the 11 months ended May 31, 2014 (interim period; unaudited), which compared favorably against Fitch's 'A' category median of 3.1%. Management has no near-term plans for additional debt.
RATING SENSITIVITIES
LIQUIDITY GROWTH: Given SCH's revenue base and location in a competitive area, additional liquidity growth will be necessary before any further upward rating movement. Fitch would expect SCH's overall financial performance to consistently exceed 'AA' category medians in order to offset risks in operating volatility.
CREDIT PROFILE
Organization Overview
SCH is a 328-licensed and 303-staffed-bed hospital located in Mt. Lebanon, PA, a suburb approximately six miles from downtown Pittsburgh. Total revenue in fiscal 2013 (June 30 year-end) was $263.3 million.
SCH, which is the primary subsidiary of the parent organization St. Clair Health Corp., is the sole member of the obligated group. As of June 30, 2013, SCH represented 91.3% of total operating revenues and 94.9% of total assets of the consolidated group. Fitch's analysis is based on the consolidated entity.
Positive Outlook
The Positive Outlook reflects SCH's continued ability to grow its overall market presence, which has improved its operating and financial profile. SCH's enhanced market presence has been supported by various service expansions, including expansion of its existing outpatient center and the opening of a second outpatient center, both in fiscal 2013, and related recruitment of medical staff. These and other strategic initiatives have resulted in solid utilization activity, which are in contrast to regional trends and have supported market share growth.
At May 31, 2014 (11-month interim; unaudited), SCH recorded approximately $13 million and $30 million in operating income and operating EBITDA, respectively, which represented a 5% operating margin and 11.5% operating EBITDA margin. These results are consistent with historical performance; over the past four fiscal years, SCH has averaged a 5.1% operating margin and 11.5% operating EBITDA margin. Management is budgeting for an operating margin and operating EBITDA margin of 5.4% and 11.9%, respectively, in fiscal 2015, which Fitch views as attainable.
Consistently solid operating profitability has supported continued improvement in the hospital's balance sheet. At May 31, 2014, unrestricted cash and improvements totaled approximately $186 million, or 8.9% above the same prior year period and roughly 33.8% ahead of the $139 million registered at June 30, 2010. The hospital's liquidity position at May 31, 2014 equaled 269.6 days cash on hand (DCOH), 45.1x cushion ratio, and 380.2% cash to long-term debt, all of which exceed the 'A' category medians.
The hospital capital budget for fiscal 2015 is approximately $20.6 million and future needs are anticipated to be at a similar level, which should support continued balance sheet growth and maintenance of the organization's low debt burden. In Fitch's view, SCH's ability to improve upon its liquidity metrics could serve as a mitigant against potential operating volatility associated with its status as a single-site hospital in a competitive service area, which includes UPMC ('AA-'/Stable Outlook) and West Penn Allegheny Health System (not rated by Fitch).
The primary service area's concentrated managed care market, which is dominated by Highmark Blue Cross Blue Shield, remains a negative credit factor. However, this credit concern is somewhat offset by management's track-record of re-negotiating contracts with favorable terms. The most recent contract was re-negotiated in 2013 and runs through fiscal year-end 2016.
SCH's low debt burden, which represented 1.5% of total revenue for the 11 months ended May 31, 2014, continued to support robust MADS coverage by EBITDA of 8.8x in fiscal 2013 and 9.8x in fiscal 2014 based on interim financials. Fitch views SCH's outstanding debt profile as conservative, which totaled approximately $49 million through June 2013 and was approximately 83% fixed rate and 17% variable rate. The series 2007 notes ($8.4 million) are indexed floaters and series 2010 note ($18.7 million) is a fixed-rate private placement. All outstanding bonds are on parity and SCH has no outstanding swaps. There are no near-term debt plans.
Disclosure
SCH covenants to provide annual audited financial information to bondholders and Fitch as well as quarterly information to the MSRB's EMMA system. Additionally, management was candid and timely in its responses to Fitch throughout the credit review process.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Public Finance Rating Criteria, this action was informed by information from the underwriter.
Applicable Criteria and Related Research:
'Nonprofit Hospitals and Health Systems Rating Criteria', dated 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=840275
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