NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA-' rating on the following bonds issued by the North Carolina Medical Care Commission (NC) on behalf of Novant Health, Inc.:
--$147,960,000 revenue and revenue refunding bonds (Novant Health Obligated Group), series 2013A;
--$264,165,000 (Novant Health, Inc.) health care facilities revenue bonds series 2010A;
--$51,355,000 (Novant Health Obligated Group) variable-rate demand health care facilities revenue refunding bonds series 2008A;
--$56,445,000 (Novant Health Obligated Group) variable-rate demand health care facilities revenue refunding bonds series 2008B;
--$37,820,000 (Novant Health Obligated Group) variable-rate demand health care facilities revenue refunding bonds series 2008C;
--$250,000,000 (Novant Health Obligated Group) health care facilities revenue bonds series 2006;
--$110,000,000 (Novant Health Obligated Group) hospital variable-rate demand health care facilities revenue bonds series 2004A;
--$25,000,000 (Novant Health Obligated Group) hosp variable-rate demand health care facilities revenue bonds series 2004B.
In addition, Fitch affirms the following parity debt at 'AA-':
--$145,305,000 Industrial Development Authority of the County of Prince William Health Care Facilities;
--Revenue and Revenue Refunding Bonds (Novant Health Obligated Group-Prince William Hospital), series 2013B;
--$250,000,000 Novant Health, Inc. Taxable Bonds, (Novant Health Obligated Group), series 2013C;
--$250,000,000 Novant Health, Inc. (NC) (Novant Health, Inc.) taxable fixed-rate bonds series 2009A;
--$100,000,000 Novant Health, Inc. (NC) (Novant Health, Inc.) taxable fixed-rate bonds series 2009B.
Some of the ratings are underlying ratings. The Rating Outlook is Stable.
Security
The bonds are unsecured obligations of the obligated group (OG), which is typical of a corporate parent model. As the system's corporate parent and sole member of its affiliates, Novant is an OG member, along with its two largest revenue-generating affiliates, Forsyth Medical Center (Forsyth) in Winston-Salem, NC and The Presbyterian Hospital (Presbyterian) in Charlotte, NC. OG members are jointly and severally responsible for payment of debt service. Novant has designated 12 affiliates as restricted affiliates), which allows Novant to cause these restricted affiliates to provide the necessary cash to pay debt service.
KEY RATING DRIVERS
SOLID OPERATING PERFORMANCE: Over the last three fiscal years, Novant has posted strong and consistent operating results, with its operating margin averaging 5.2% and its operating EBITDA averaging 12.5%, which is better than the prior three year period and above Fitch's 'AA' medians of 3.9% and 11%, respectively. The strong operating results in 2014 were helped by a 4% increase in adjusted admissions and a 2.3% increase in inpatient surgeries from 2013 to 2014.
GOOD LIQUIDITY GROWTH: Strong cash flow has helped Novant increase its unrestricted cash and investments. At year-end 2014 (unaudited results), Novant had $2.3 billion in unrestricted cash and investments (net of a short-term borrowing program), which is up 62% since year end 2011.
MAXIMIZING SYSTEM ASSETS: Novant is a large multi-state system with 14 hospitals, with $3.8 billion in operating revenue, and a physician network that includes more than 1,200 employed physicians in 400 locations. Fitch has historically viewed this sizable market presence as a credit strength. In recent years, Novant's has been focused on maximizing its system assets seeking to grow volumes through physician alignment strategies, deepen its market presence by utilizing its information technology platform, and continuing to find efficiencies through various initiatives across the system. Fitch believes the solid financial results in the last few years reflect the gains on this strategy and position Novant well for health care reform.
COMPETITIVE SERVICE AREAS: Novant operates in competitive service areas, with nine of its 14 hospitals, including its two flagship facilities, located in Winston-Salem and Charlotte, two very competitive markets. The competitive service areas are a credit concern and intensify the pressure on Novant's operations and the need for Novant to continue to make investments, whether in physical assets or physicians, to maintain market share.
ELEVATED DEBT BURDEN: Novant's debt to EBITDA improved to 3.5x in 2014 (unaudited) from 4x in 2013 but remains above the 'AA' median of 2.9x, indicating an elevated debt burden. Novant has averaged approximately $250 million a year in capital spending over the last four years, completing three hospitals over this time. Given the competitive service areas Novant operates within, Fitch expects capital spending to remain elevated, which would also indicate the need for future financings. Novant's five-year capital plan is approximately $1.4 billion.
RATING SENSITIVITIES
STABLE PERFORMANCE EXPECTED: Over the past few years, Novant's improved operations coupled with North Carolina's supplemental funding program have produced financial results exceeding Novant's budgeted targets, which has generally been for operating EBTIDA of approximately $350 million. Fitch's rating assumes that Novant's performance will return to its targeted operating EBITDA levels, especially given the changes expected in supplemental funding programs and Novant's competitive need to continue to invest in and grow its system. Positive rating pressure could occur if Novant is able to sustain its current levels of performance and continue to grow its liquidity. Negative rating pressure could occur if Novant experiences a sustained period of below budgeted results.
CREDIT PROFILE
Novant is a regional integrated delivery system with 14 hospitals (2,277 licensed beds), anchored by Forsyth Medical Center in Winston-Salem (921 licensed beds) and Presbyterian Medical Center in Charlotte (622 licensed beds). Novant's corporate headquarters are located in Winston-Salem, NC, with facilities located throughout the greater Winston-Salem area, greater Charlotte area, the southeastern coastal region of North Carolina, and Northern Vriginia. In fiscal 2014 (unaudited), Novant had total operating revenues of $3.8 billion.
The 'AA-' rating is based on Novant's consistent operating performance over the last four years, improving liquidity, and an overall good competitive position characterized by a large clinical and operational base, extensive physician network, and good service area demographics. Credit concerns are Novant's competitive service areas and its elevated leverage.
Financial Results
Unaudited 2014 results show Novant finishing with a 4.7% operating margin ($178.3 million in operating income) and a 12.2% operating EBITDA margin. Results were supported by above budget performance in most of Novant's markets, including Charlotte and Winston-Salem. Novant's Northern Virginia market was below budget and prior year performance. Novant and the University of Virginia Health System (UVA) recently announced a letter of intent to form a partnership in the Northern Virginia market, where Novant will include two hospitals and UVA one, Culpepper Regional. While Fitch will assess the partnership once an agreement is finalized and details are available, Fitch believes a partnership could be beneficial to Novant given the competitive landscape in the Northern Virginia market.
The performance in 2014 was also helped by a few one-time items, including a $30 million net gain on the sale of Novant's ownership interest in Lake Norman Regional Medical Center and Gaffney Medical Center and $12 million in income related to miscellaneous items. Novant also received $56 million in North Carolina provider tax funds, down from $70 million in the prior year, and Fitch expects that number to drop further in 2015.
Strong cash flow helped Novant's unrestricted liquidity grow by 11.8% from 2013 to 2014 (net of a short term borrowing program). At Dec. 31, 2014, Novant had $2.3 billion in unrestricted cash and investments, which equated to 249 days cash on hand, an 18.7x cushion ratio, and 128.2% cash to debt. While all of these trail their respective 'AA' medians, they have significantly improved over the historical period. At Dec. 31, 2011, Novant had 170.5 DCOH, an 11.3x cushion ratio, and cash to debt of 82.8%. Fitch notes the increase in liquidity as a credit positive as historically Novant's light liquidity was a major credit concern.
Debt Profile
Fitch uses a maximum annual debt service (MADS) of $125 million and smoothes for two bullet maturities occurring over the next five years. Actual annual debt service will range from $101.9 to $113.5 million over this time and then lower to below $100 million. Unaudited 2014 results show MADS coverage of 4.1x, which trails the category median of 5.4x. Coverage of actual debt service ($107.8 million), which is the figure Novant is tested on in its Master Trust Indenture, was 4.8x.
The below median coverage levels reflects in part Novant's elevated debt burden. The actual debt service as a percentage of revenue was 2.8% at Dec. 31, 2014, above Fitch's 'AA' category median of 2.6% and its debt to capitalization was 41.1% compared to a median of 31.1%. Although both figures have been moderating through the historical period, and Fitch expects that trend to continue.
Novant's long-term debt is $1.8 billion. Approximately 80% of it is fixed rate and 20% is variable. Novant hedges approximately 78% of its variable rate debt with three fixed payor swaps and has good counterparty diversity using three separate counterparties. Aggregate notional value of the swaps is currently $280.6 million and the aggregate mark to market is a negative $62.2 million. Novant has no collateral posting requirements as long as it maintains a rating at or above an 'A-'.
Disclosure
Novant covenants to provide both annual and quarterly disclosure to the MSRB's EMMA system. To date, Novant's disclosure has been timely and has included consolidated financial information for the entire system, including a balance sheet, income statement, cash flow statement, and utilization statistics.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 2014);
--'Revenue-Supported Rating Criteria' (June 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
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981828
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