CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded and removed from Rating Watch Negative the following Cape Girardeau County Industrial Development Authority on behalf of Southeast Missouri Hospital Association (SEHO, d/b/a SoutheastHEALTH):
--$92.9 million series 2007 to 'BBB-' from 'BBB+'.
The Rating Outlook is Negative.
SEHO also has $60 million of series 2013A&B revenues that were directly placed with a bank that Fitch was not asked to rated.
SECURITY
The bonds are secured by a pledge of the unrestricted receivables of Southeast Missouri Hospital Association, with additional security provided by a debt service reserve fund.
KEY RATING DRIVERS
SIGNIFICANT OPERATING LOSS IN 2013: The rating downgrade to 'BBB-' reflects significant and unexpected operating losses in 2013, which resulted primarily from billing and revenue cycle issues. SEHO lost over $39 million from operations and significantly reduced its unrestricted liquidity to $53.4 million.
COVENANTS MISSED: Following a delayed release of the audit, SEHO disclosed covenant violations for the year ended Dec. 31 2013. SEHO did not make its 1.25x debt service coverage or minimum 60 DCOH covenant; actual coverage was a negative -0.56x and DCOH was 59.7, which Fitch views unfavorably. SEHO received a waiver from Region Bank for the covenant violations under the series 2013 loan agreements as well as the late audit disclosure.
TENUOUS LIQUIDITY: Total unrestricted liquidity was $50.4 million as of June 30, 2014, equal to a very light 55.9 DCOH and 32.1% cash to debt as Fitch calculates. Further, days in accounts receivable remain high at 65.9, and outpaced payables which were closer to 50 days. Incremental cash improvement is anticipated over the next 12-24 months; however, metrics are expected to lag Fitch's 'BBB' median levels through the near to intermediate term, leaving little cushion versus its 60 DCOH covenant.
OPERATING IMPROVEMENTS UNDERWAY: In addition to one-time savings near $10 million, SEHO has identified approximately $30 million in annual net operating improvements for fiscal 2014 and beyond. Management plans to continue execution related to its regional growth strategy, which will be necessary to support better results over the intermediate term.
MANAGEABLE CAPITAL PLANS: Despite the impact from operating losses, SEHO's leverage position remains manageable, and its capital needs will be supported in part by $39 million in remaining project funds. In 2013 MADS as a percent of revenue was 3.1% and debt was 44.8% of capitalization, both comparable to Fitch's 'BBB' medians of 3.6% and 44.9%, respectively.
RATING SENSITIVITIES
BALANCE SHEET STABILITY ESSENTIAL: The 'BBB-' rating reflects Fitch's belief that SEHO will improve its revenues cycle and collections and meets its semi-annual liquidity covenant test. A violation of the liquidity covenant requirement would trigger a further negative rating action.
CREDIT PROFILE
Located in Cape Girardeau, MO (approximately 100 miles south of St. Louis), the SoutheastHEALTH (SEHO) system includes an acute care hospital with 230 staffed beds, three regional acute care facilities with a total of 94 staffed beds, home health, hospice, a new cancer center, and various other ambulatory sites and services across the Southeast Missouri region. In 2013, SEHO produced total revenues of $309 million.
FINANCIAL PROFILE IMPACT
The downgrade to 'BBB-' reflects the significant and unexpected decline in SEHO's financial profile in fiscal 2013, coupled with Fitch's expectation that meaningful improvement to liquidity is unlikely over the near term. SEHO has produced some evidence of recovery, generating a 6.1% operating EBITDA and 2.2x coverage of MADS by the same through June 30, 2014.
Following an update to its electronic health record platform, SEHO experienced significant revenue cycle issues during 2013, resulting in an unexpected operating loss and reduction in unrestricted liquidity. For fiscal 2013, SEHO's operating losses and revenue cycle challenges reduced its unrestricted liquidity by nearly 40%, bringing day's cash to 59.7 and cash to debt to 34.1%. Meaningful improvement to liquidity is not anticipated as SEHO is projecting improvement that will still be well below Fitch's BBB' median of 145 and very close to its 60 DCOH covenant. SEHO has little, if any, room for a decline in asset values within its investment portfolio.
COVENANT VIOLATIONS
SEHO has approximately $155 million in long term debt outstanding, including $93 million in series 2007 fixed rate bonds and $60 million in series 2013A&B bond in a variable rate mode directly placed with Regions Bank. Both series have a nominal mature of 2043. The $40 million series 2013A have mandatory tender in 2023 and the $20 million series 2013B have a mandatory tender in 2020.
In addition to failing to timely file its audited fiscal 2013 results, SEHO violated its rate covenant under both the series 2007 and series 2013 indentures. Under the more stringent series 2013 covenants, SEHO did not meet its 1.25x requirement which is tested quarterly on the prior four quarter results. Additionally, SEHO is required to maintain a minimum of 60 days cash on hand which tested semi-annually. Regions granted a waiver on Aug. 13, 2014 to the defaults for the Dec 31, 2013 and the June 30 2014 test dates with no change in terms. While SEHO violated its rate covenant under the series 2007 indenture, no event of default occurred as SEHO engaged a management consultant as required under the documents. There is no liquidity covenant in the series 2007 indenture.
OPERATING IMPROVEMENTS EXPECTED
Fitch met with senior leadership during its review, and expects their targeted plan to address structural issues across the system, namely in revenue cycle, billing, clinical practice management, and operating efficiency, will help stabilize and improve operating cash flow over the near term. Management has identified approximately $10 million in one-time and $30 million in annual recurring net benefit to the system, which would go far to eliminate current operating losses in the near term and rebuild liquidity in the intermediate term.
SEHO is budgeting to generate approximately $15 million in operating cash flow for 2014, and increased operating cash flow for 2015. While sufficient to address necessary capital and debt service needs, meaningful impact to unrestricted liquidity is not anticipated. While not expected, Fitch believes SEHO does not have the necessary balance sheet flexibility to withstand any further volatility in cash flow at the current rating level. Therefore any unexpected declines in current liquidity levels, or failure to sustain positive operating cash flow trajectory in line with projected results could prompt additional rating pressure.
CONTINUING DISCLOSURE
SEHO covenants to disclose annual audited financial statements within 120 days after the end of the fiscal year and quarterly financial and operating information within 90 days at the end of each quarter. SEHO disseminates this information including a balance sheet, income statement, cash flow statement and utilization statistics through the Municipal Securities Rulemaking Board EMMA website.
SEHO has a history of delayed disclosure, which was the case for fiscal 2012 and fiscal 2013 audited results.
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=871474
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