Fitch Affirms Beloit Health System (WI) Revs at 'A-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'A-' rating on the following bonds issued by the Wisconsin Health & Educational Facilities Authority on behalf of Beloit Health System (BHS):

--$30,050,000 series 2010B revenue refunding bonds.

The Rating Outlook is Stable.

SECURITY

Bond payments are secured by a pledge of the pledged revenues of the obligated group, a mortgage lien and a debt service reserve fund.

KEY RATING DRIVERS:

SOLID OPERATING PROFITABILITY: Despite a slight compression over the past two years due to a combination of increased observation stays and increased bad debt, operating profitability remains solid for the 'A-' rating with operating EBITDA margin equal to 9.1% in fiscal 2013 and 9.9% in the six-month interim period ending June 30, 2014 (the interim period) relative to Fitch's 'A' category median of 9.5%.

MODERATE DEBT BURDEN: BHS's moderate debt burden and solid profitability combine to provide for solid coverage. Maximum annual debt service (MADS) coverage by EBITDA of 3.1x in fiscal 2013 and 3.7x in the interim period remain solid for the 'A-' rating despite the issuance of approximately $11 million of new debt in fiscal 2013. Capital plans include the potential issuance of additional debt in fiscal 2015.

LEADING MARKET SHARE: BHS holds a leading market share of approximately 60% in its primary service area (PSA) with no competitor holding greater than 20% market share. The strong market position enhances BHS's overall credit profile and is solidified by a highly aligned medical staff which was strengthened by the acquisition of the Beloit Clinic in 2010.

LIQUIDITY IMPROVED BUT REMAINS LIGHT: Liquidity continued to improve after the Beloit Clinic acquisition in 2010, but was negatively impacted by a slowdown in collection of receivables related to the implementation of a new IT system. Days in accounts receivable improved from 61.2 days to 44.5 days at Aug. 31, 2014 and unrestricted liquidity improved to $80.4 million, but liquidity metrics remain light for the rating category with 105.8% cash-to-debt and 13.6x cushion ratio.

RATING SENSITIVITIES

CONSISTENT OPERATING CASH FLOW: Fitch expects that current operating cash flow levels will be maintained allowing for further strengthening of liquidity. Continued strengthening of liquidity metrics relative to debt to a level consistent with Fitch's 'A' category medians and continued strong operations could result in positive rating action. Fitch will assess the credit impact of any additional debt as capital plans and funding sources become more certain.

CREDIT PROFILE:

Beloit Health System (BHS) operates a 256 licensed bed community hospital and a multi-specialty physician group in Beloit, Wisconsin, located approximately 75 miles northwest of Chicago. BHS also owns and operates a home care service, independent and assisted living units, urgent care, and related ancillary services. Total operating revenues equaled $196.4 million in fiscal 2013 (Dec. 31 year end).

SOLID OPERATING PROFITABILITY

Operating profitability has been consistently strong but has been slightly compressed in recent years due to a combination of a shift from inpatient admissions to less profitable observation stays and increased bad debt in fiscal 2013 and the interim period. Operating EBITDA margin decreased from a strong 11.2% in fiscal 2012 to 9.2% and 9.1%, respectively, in fiscal years 2012 and 2013 before increasing to 9.9% in the interim period. Operating profitability remains solid for the rating category relative to Fitch's operating EBITDA margin 'A' category median of 9.5%. Fitch notes that operating profitability has remained solid for the rating category despite the purchase in January 2010 of Beloit Clinic, which had a history of operating losses.

BHS's high exposure to government payors makes BHS's operating profitability vulnerable to federal and state budget cuts and reliant on supplemental funding. Medicaid and Medicare accounted for 62% of gross revenues in fiscal 2013.

MODERATE DEBT BURDEN

Despite the issuance of approximately $11 million of series 2013 bonds, BHS's debt burden remains moderate with MADS equal to 3% of fiscal 2013 operating revenue. MADS coverage by EBITDA of 3.1x in fiscal 2013 and 3.7x in the interim period remain solid for the 'A-' rating category and relative to Fitch's 'A' category median of 3.8x. BHS may issue approximately $16 million in additional debt in fiscal 2015 to fund construction of a new ambulatory surgical center. Fitch will assess the credit impact of any new debt as details become more certain.

LEADING MARKET SHARE

Credit stability is bolstered by BHS's strong leading market share of approximately 60% in its PSA. Mercy-Janesville is BHS's primary competitor in the PSA with 17% market share while UW Health holds 11.1% market share. No other hospital holds greater than 4% market share in the PSA. BHS's market position and operations are bolstered by its strong physician alignment which was further strengthened by the merger with the Beloit Clinic.

LIQUIDITY IMPROVED BUT REMAINS LIGHT

Unrestricted liquidity metrics continued to improve since the clinic acquisition in 2010, but were affected negatively by a large-scale IT implementation in March 2013. While successful on the clinical side, the IT implementation caused a slowdown in the collection of receivables with days in accounts receivable increasing to 61.2 at Dec. 31, 2013 and 60.2 at June 30, 2014 from 40.6 at Dec. 31, 2012. Unrestricted liquidity decreased from $73.4 million at Dec. 31, 2012 to $70.2 million at June 30, 2014. Management made significant progress in the interim period ending August 31, 2014 with unrestricted liquidity increasing to $80.4 million and days in accounts receivable decreasing to 44.5. However, liquidity metrics remain light for the rating category with 154.4 days cash on hand, 13.6x cushion ratio and 105.8% cash-to-debt relative to Fitch's 'A' category medians of 199.2 days, 17.0x and 131.2%.

DISCLOSURE

BHS covenants to provide annual audited disclosure within 150 days of fiscal year-end and quarterly disclosure within 60 days of the first three quarters-end and within 90 days of the end of the fourth quarter. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.

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=874934

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
Adam Kates
Director
+1-312-368-3180
Fitch Ratings, Inc.
70 West 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
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Adam Kates
Director
+1-312-368-3180
Fitch Ratings, Inc.
70 West 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
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com