NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded to 'A' from 'BBB+' the rating on the following health facilities revenue bonds issued by the North Carolina Medical Care Commission on behalf of Stanly Memorial Hospital Project:
--$11,140,000 fixed rate bonds, series 1999;
--$6,705,000 fixed rate bonds, series 1996.
The Rating Outlook is revised to Stable from Positive.
SECURITY
The bonds are secured by a pledge of gross revenues, a negative pledge of assets, and a debt service reserve fund.
KEY RATING DRIVERS
STRONG BALANCE SHEET: The upgrade to 'A' from 'BBB+' reflects, in part, Stanly Health Services' (SHS) significant improvement in balance sheet metrics over the last year. At June 30, 2014, growing unrestricted cash and investments combined with a low and declining debt burden produced balance sheet metrics favorable even at the 'A' rating. In addition, CHS has pledged to provide $70 million in capital support as part of the merger.
MERGER COMPLETE: The upgrade is further driven by completion of merger with the Charlotte-Mecklenburg Hospital Authority (d/b/a Carolinas HealthCare System, or CHS) on March 1, 2014. SHS will be fully integrating into CHS' operating, financial and IT platforms over the next two years under a Change of Control Agreement. SHS has already benefitted from being part of CHS from operating under a management services agreement since 2009, but management believes there remain additional opportunities.
WEAK 2013 PROFITABILITY: SHS posted an operating loss in the fiscal year ended Sept. 30, 2013, following several years of modest profitability. Fiscal 2013 was heavily impacted by a spike in bad debt and lower utilization, which continue to be driven by SHS' unfavorable payor mix with over 60% in governmental payors and 13% in self-pay. However, profitability showed signs of recovery through the 2014 interim period with more vigilant expense control to manage lower revenues. Fitch also believes the merger with CHS will bring further operational stability to SHS in the medium to long term.
LOW DEBT BURDEN: With the exception of 2013, leverage metrics have been historically consistent with the 'A' rating due to a light debt burden. Coverage of maximum annual debt service (MADS) dipped to 2.8x in fiscal 2013 but rebounded 7.1x in the six month interim period ended June 30, 2014. Management also indicated that no new debt will be issued at the SHS level.
RATING SENSITIVITIES
INCREASED STABILITY EXPECTED: Fitch believes CHS' strong presence in the Charlotte metro area, sound balance sheet, and large revenue base should provide further operational stability for SHS beyond what is realized from the management services agreement. Fitch's analysis assumes cash and investments will remain at the SHS level and that the bonds will remain outstanding with SHS as the sole obligor on the bonds. Any material changes will be evaluated as information is publicly disclosed.
CREDIT PROFILE
Stanly Health Services is located in Albemarle, NC. The obligated group includes Stanly Regional Medical Center (109-bed acute care hospital), Stanly Manor (100-bed long-term care facility), and Stanlex Inc. (home health agency). Fitch's analysis is based on the consolidated entity, which also includes the foundation, medical group, and Lifesmart Inc. (case management). Total operating revenues were $130.3 million in fiscal year ended Sept. 30, 2013.
Merger with Carolinas HealthCare System
CHS (revenue bonds not rated by Fitch) is a quaternary provider located in Charlotte and is the largest health system in North and South Carolina. CHS had $4.6 billion in total system (primary enterprise) operating revenues and $7.9 billion in total enterprise operating revenues (both primary enterprise and managed facilities) in fiscal year ended Dec. 31, 2013. Since 2009, CHS provided executive management as well as financial oversight, supply-chain, physician practice, information technology, quality and safety, and revenue cycle support through a management services agreement.
On March 1, 2014, SHS completed its merger with CHS and is undergoing a two year integration process with a Change of Control Agreement in place. While the management services agreement has already allowed SHS to benefit from the integrated relationship, Fitch believes the merger will provide further operational and financial stability in the coming years as SHS experiences the full impact of healthcare reform. Also, CHS has pledged to invest approximately $70 million over 12 years in SHS as part of the ownership transfer.
Strong Liquidity
At June 30, 2014, unrestricted cash and investments totaled $60.7 million, up from $49.1 million one year prior. The growth in liquidity was primarily driven by better collections and investment returns. Days cash on hand of 183.7 is increased from 140.6 days one year prior, and is consistent with the 'A' median of 199.2 days. Due to a low debt burden, cushion ratio of 22.8x and cash to debt of 339.5% are significantly stronger than the respective 'A' medians of 17x and 131.2%. Fitch expects liquidity levels to remain strong given recovering cash flow and the capital support pledged from CHS.
Weak 2013 Profitability
Fiscal 2013 showed continued weakening in profitability primarily driven by an increase in bad debt, which has risen from 9% of patient service revenue in 2009 to 15% 2013. Patient service revenues also declined from 2012 to 2013 due to weaker volumes. As a result, Operating margin dropped from 1.8% in 2012 to a negative 2.4% in 2013. Similarly, operating EBITDA margin was 8.1% in 2012 and 4.5% in 2013 compared to the 'A' median of 9.5%.
While the negative trends continued through 2014, profitability improved due to effective performance management initiatives. In the six months ended June 30, 2014, operating and operating EBITDA margins of 0.4% and 7.5% were considerably better than negative 0.8% and positive 6%, respectively, in the prior year period. Management indicated SHS is on target to meets its target operating EBITDA margin of 7.2% in fiscal 2014, which Fitch also believes is achievable.
Low Debt Burden
At June 30, 2014, SHS had $17.9 million in long-term bonds outstanding, consisting of series 1999 and 1996 bonds. All debt is fixed and produces level debt service of $2.6 million through 2016 and then drops down below $2 million. MADS coverage dipped to 2.8x in fiscal 2013 due to weak cash flows, but rebounded to 7.1x through the six month interim period ended June 30, 2014. MADS as a percentage of revenue of 2% and debt to capitalization of 20.8% in fiscal 2013 compares well against the 'A' medians of 3.1% and 36.3%. SHS is not party to any swaps.
DISCLOSURE
SHS provides annual disclosure to the Municipal Securities Rulemaking Board's EMMA System within 120 days of year-end, including balance sheet, income statement and utilization statistics. Disclosure to Fitch has been timely and thorough.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria', June 16, 2014;
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 30, 2014.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
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=851394
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.