Fitch Rates BRRH Corp & Affiliates, FL 2014 Revs 'BBB'; Upgrades Outstanding; Outlook Revised

NEW YORK--()--Fitch has assigned a 'BBB' rating on the expected issuance of the following bonds issued on behalf of BRRH Corporation and Affiliates (BRRH):

--$93,900,000 Palm Beach County Health Facilities Authority Hospital Revenue Refunding Bonds (BRRH Corporation Obligated Group) series 2014

In addition, Fitch has upgraded to 'BBB' from 'BBB-' the following parity debt issued by the Palm Beach County Health Facilities Authority (FL):

--$78,240,000 Hospital Revenue and Refunding Bonds series 2001

--$19,430,000 Hospital Improvement Revenue Bonds series 1999A

The Rating Outlook has been revised to Stable from Positive.

The bonds will be issued as fixed rate and refinance BRRH's 1999A and 2001 bonds, which represent all of its outstanding long term debt. Maximum annual debt service (MADS) is expected to be $10.2 million and includes capital leases. Debt service is front loaded as MADS occurs in 2016 and then steadily drops leveling off at $6.2 million in 2025. The bonds are expected to mature in 2031. The 2014 bonds will sell via negotiation the week of Sept 8.

SECURITY

Debt payments are secured by a gross revenue pledge of the obligated group, consisting of BRRH Corporation, the parent of BRRH, and the hospital. Payments are also secured by a mortgage. In addition, the BRRH Foundation is a Designated Affiliate under the master trust indenture.

KEY RATING DRIVERS

SOLID PERFORMANCE IN FY 2014: The upgrade reflects the continued strengthening of BRRH's operating performance with unaudited fiscal 2014 (June 30-year end) results showing BRRH posting its second consecutive year with a positive operating margin after its financial difficulties in 2008.

GOOD VOLUME GROWTH: In 2014, BBRH's inpatient admissions grew 8% and inpatient and outpatient surgeries grew 5% each. The volume growth is a result of continued physician recruitment and the success of BRRH's strategy to increase patient volumes in its outer service area through the placement of outpatient centers. The strategy has partly mitigated Fitch's concerns regarding the seasonality of BRRH's volumes and revenue given its large patient base of seniors who spend only part of the year in the service area. BRRH plans to open its first outpatient center in Broward County, which is south of Boca Raton, in the next fiscal year.

MANAGEABLE DEBT BURDEN: BRRH has a manageable debt burden as indicated by maximum annual debt service as a percent of revenue of 2.6% and debt to EBITDA of 3.1x at June 30, 2014, both better than Fitch's 'BBB' category medians. The upgrade reflects Fitch's expectation that BRRH's debt burden will remain manageable as BRRH is able to fund its largest capital needs through philanthropic support.

LIQUIDITY CONTINUES TO REBUILD: After unrestricted cash and investments dropped to $85.2 million and days cash on hand (DCOH) to 99.2 at year end fiscal 2010, BRRH has steadily rebuilt its balance sheet with unrestricted cash and investments of $117.5 million at June 30, 2014 equating to 125.0 DCOH, a 12.5x cushion ratio, and 114.3% cash to debt. BRRH's all fixed rate debt and manageable capital needs lend further stability to its balance sheet.

RATING SENSITIVITIES

OPENING OF NEUROSCIENCE INSTITUTE: By calendar year end, Fitch expects BRRH to open its Marcus Neuroscience Institute (MNI), which will significantly enhance the neurological services BRRH offers, especially for neurosurgery. Fitch believes that the opening and ramping up of the MNI has the potential to cause near term disruption in BRRH's operating performance.

FURTHER POSITIVE RATING POTENTIAL: Over the medium term, Fitch believes that once the MNI stabilizes and should BRRH be able to sustain current levels of operating performance and continue to grow its liquidity, further positive rating action may be warranted.

Credit Profile

BRRH is an acute care hospital located in Boca Raton, FL, with 350 staffed beds. In fiscal 2014 (unaudited), BRRH reported total operating revenue of approximately $366.6 million. The 2014 figures reported in this press release are based on unaudited financial results.

Sustained Positive Performance

The upgrade reflects the improved financial profile of BRRH. In fiscal 2014 (June 30 year end), BRRH posted a positive operating margin for the second consecutive year, and pro forma maximum annual debt service (including capital leases) was 3.3(x), above Fitch's 'BBB' category median of 2.6x. Further support for the upgrade is indicated by the longer positive trend in BRRH's operating EBITDA margin, which has stayed above 8% in four out of the last five years, relative to Fitch's 'BBB' median of 7.9%. In 2011, BRRH's operating EBITDA fell below the median as operations were impacted by a large IT implementation project and a major emergency room renovation.

BRRH continues to distance itself from fiscal 2008, when it posted a $61 million operating loss and had its unrestricted cash and investments drop from a high of approximately $225 million in fiscal 2007 to a low of $85 million by fiscal 2010. BRRH's current CEO and COO were part of a consultant team that was brought in to initiate an operational and strategic turnaround in 2008 and have been integral in formulating and executing the strategy that has strengthened operations.

Under the current leadership, BRRH has undertaken a number of strategic initiatives, both for growth and efficiency, including investing in information technology, pursuing an outpatient strategy, refocusing and strengthening certain clinical service lines and improving physician recruitment and alignment. All of these have contributed to the financial turnaround, the solid growth experienced in patient volumes in fiscal 2014, and an uptick in BRRH's market share.

Improved Liquidity and Manageable Debt Burden

The steady cash flow has helped BRRH rebuild its balance sheet. Unrestricted cash and investments at June 30, 2014 was $117.5 million, up from the $85.2 million at fiscal year end 2010. BRRH's liquidity metrics now compare well with 'BBB' category medians, with days cash on hand of 125 days, a pro forma cushion ratio of 11.5x, and cash to debt of 114.3%. In addition, all of BRRH's debt is fixed rate and BRRH has no swaps, which adds further stability to its liquidity position.

BRRH's debt burden is manageable as measured by pro forma MADS as a percent of revenue of 2.8% and debt to EBITDA of 3.1x, at year end fiscal 2014, both better than their respective medians of 3.6% and 3.9x.

Strategy and Partnerships

Fitch believes that a key component of the turnaround and its sustainability is BRRH's outpatient strategy. The goal of the strategy was to expand BRRH's patient base, both geographically and demographically, beyond BRRH's core senior population through an outpatient presence in areas away from the coast, where most of BRRH's patients have historically come. In 2009, BRRH started the BocaCare Physician Network, which includes a number of primary care physicians in the community and began to expand its outpatient clinical footprint.

Currently, BBRH has five primary care sites, five imaging locations, three breast care centers, two radiation therapy locations, and home health, wound care, pain management, and rehabilitation services, offered in an outpatient setting. Further support has been provided by the recently renovated emergency room that opened in fiscal 2013 and has been drawing patients from further out in the service area, including north Broward County.

Fitch views BRRH's two recent partnerships positively. In June of 2013, BRRH signed an agreement to partner with the H. Lee Moffitt Cancer Center (Moffitt), by joining its oncology network. Moffitt is the only National Cancer Institute Comprehensive Cancer Center based in Florida. BRRH's oncology physicians who participate will be credentialed as members of the Moffitt faculty and collaborate with Moffitt clinicians on patient care and research. The partnership will also give BRRH access to clinical trials, expanding the treatment options it can provide to oncology patients.

In January 2014, BRRH signed a three year agreement with North Shore-Long Island Jewish Health System (NSLIJHS) (Fitch general revenue bonds rated 'A-', positive outlook). The long distance affiliation reflects a common patient base of people who live in the New York area and spend winters in Palm Beach and Broward counties. The affiliation will provide opportunities to collaborate on patient care, clinical program development and research and education, as well as access to other resources. Fitch believes the two agreements reflect the improved financial and market position of BRRH and that the partnerships have the opportunity to support further patient volume growth.

Capital Plans/Philanthropy

Within the next few months, BRRH will open its new neuroscience center, the MNI, which is being funded by philanthropy, including a lead gift of $25 million. The MNI is contiguous to BRRH's main inpatient tower, and BRRH has made key physician recruits, including a head of the center and one neurosurgeon, with two more to recruit in the next year. Fitch has concerns about the costs of operating the neuroscience center, especially as it ramps up. BRRH is budgeting for a slight loss for the MNI in fiscal 2015. Mitigating some of Fitch's concern is the clinical focus of the MNI, which will include four new state-of the-art operating rooms (ORs)that will help with surgical capacity as BRRH's main hospital ORs are near capacity, as well as there are few competitors in the region for the tertiary neurological services that the MNI will offer.

The upgrade and any further positive rating action incorporates BRRH's consistently high level of philanthropic support which remained strong even through its operating troubles in 2008. Over the last four years, BRRH's has received between $25.7 million and $41.7 million of annual support, including for capital projects. The philanthropic support enables BRRH to undertake significant capital projects without having to incur additional debt or spend down its balance sheet, relieving a financial pressure that most other health systems have to contend with.

Recent capital expenditures supported by philanthropy include the purchase of two DaVinci robots and the building of a state-of the-art hybrid operating room. The next project after the MNI will be a new outpatient women's center, for which a $10 million lead gift has already been received.

Disclosure

BRRH covenants to provide annual audited financials and quarterly disclosure, which includes management discussion and analysis, utilization statistics, an income statement, a balance sheet, and cash flow statement.

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

Applicable Criteria and Related Research:

--'U.S. 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=857074

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.

Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow
Director
+1 212-908-9186
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eva Thein
Senior Director
+1 212-908-0674
or
Committee Chairperson
James LeBuhn
Senior Director
+1 312-368-2059
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow
Director
+1 212-908-9186
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eva Thein
Senior Director
+1 212-908-0674
or
Committee Chairperson
James LeBuhn
Senior Director
+1 312-368-2059
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com