Fitch Rates Monongalia Health System's (WV) Revs at 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'A-' rating on the following series of bonds issued on behalf of Monongalia Health System, WV (Mon Health):

--$50.1 million Monongalia County Building Commission refunding and improvement revenue bonds (Monongalia Health System Obligated Group), series 2015.

Proceeds will refund outstanding 2005A series bonds, fund system capital improvements, and pay various costs of issuance. The bonds are expected to price the week of April 13.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues and a mortgage pledge of the obligated group, which accounted for approximately 94% of system assets and 94% of system revenues in fiscal 2014. The results include four months of the operations of Preston Memorial Hospital (Preston), a critical access hospital, which was acquired effective Feb. 28, 2014, but is not a member of the obligated group. Preston is in the process of completing construction of a replacement facility. For purposes of this release, Fitch reports on the results of the consolidated system.

KEY RATING DRIVERS

STRONG FINANCIAL RESULTS: The 'A-' rating and Stable Outlook are based on Mon Health's strong financial performance in fiscal 2014 (year-end June 30) and through the six-month interim period ended Dec. 31, 2014, with operating and operating EBITDA margins better than Fitch's 'A' category medians.

SOLID MARKET POSITION: Mon Health continues to have a stable market share in the mid-30% range in a service area with a stable economy. While there is a sizeable competitor in its market - West Virginia University Hospital (University), the two have essentially separate medical staffs and their respective market shares have reportedly not shifted. The acquisition of Preston and its replacement facility will make it possible for more Preston County patients to receive care locally and should increase the level of higher acuity referrals to Mon Health.

GOOD COVERAGE AND MODERATING DEBT LOAD: Mon Health's leverage ratios have moderated but increased somewhat as a result of the inclusion of debt related to the Preston acquisition. Pro forma maximum annual debt service (MADS) as a percentage of revenue was 3.5% at Dec. 31, 2014, and included the full impact on the consolidated system leverage of the permanent financing of the Preston facility replacement (estimated $38.5 million). Pro forma coverage of MADS through the 2015 interim period was 4.5x, better than the 'A' median.

MIXED LIQUIDITY: Unrestricted cash and investment increased to $148.8 million at Dec. 31, 2014, from $117.9 million at 2013 fiscal year-end and translate to 209.7 days cash on hand (DCOH), slightly higher than the 'A' median of 199 days, but cash to pro forma debt, including the Preston debt, at 93%, is lower than the 'A' median of 131%.

RATING SENSITIVITIES

MODERATION OF DEBT LOAD: Continued strong operating performance and a further moderation of the debt load over the near term could lead to positive rating pressure.

PLAN OF FINANCE

The bonds are expected to be issued as fixed rate obligations and to price the week of April 13. Bond proceeds and the outstanding series 2005 debt service reserve fund will current refund outstanding 2005 series bonds. Additionally, $5 million in new money will be issued for system capital improvements.

CREDIT PROFILE

Monongalia Health System, headquartered in Morgantown, West Virginia, consists of Monongalia General Hospital, a 189 staffed bed acute care hospital, Mon Elder Services (90 independent living units and 40 assisted living units), an ambulance company, and is an owner/part owner of several entities, including a durable medical equipment company, a home health agency, a rehabilitation facility, and an ophthalmology surgery center. Effective Feb. 28, 2014, Mon Health acquired Preston Memorial Hospital (Preston), a 25-bed critical access hospital located in Kingwood, Preston County, approximately 40 miles from Morgantown. Preston is in the process of constructing a replacement facility close to its current location, which is expected to be completed later this spring. The consolidated system had revenues of $247.3 million in fiscal 2014, which included four months of Preston operations.

STRONG FINANCIAL RESULTS

Mon Health ended fiscal 2013 with operating income of $5.2 million, short of budget due to stagnant patient revenues, but fiscal 2014 saw return to historically strong operations, with operating income of $11.8 million, for an operating margin of 4.8% and operating EBITDA margin of 13.8%, both better than Fitch's 'A' category medians of 2.5% and 9.5%, respectively. Patient revenues increased by 12% in fiscal 2014 and by a robust 28% though the second quarter of 2015 as compared to the same period in the prior year. Solid operations were maintained through the second quarter of fiscal 2015 with operating income reported at $10.3 million, equal to operating margin of 7% and operating EBITDA margin of 14.7%. Management has budgeted to end the year with operating income of $12.4 million (4.3% operating income), which Fitch believes to be achievable and may likely be exceeded.

The acquisition of Preston is not anticipated to have a negative impact on system operating profitability. As a critical access hospital Preston receives favorable Medicare reimbursement based on a cost plus formula. The new facility is expected to be completed in May or June 2015. As part of the acquisition, Mon Health guaranteed the construction loan for the replacement facility and will be responsible for a portion of the permanent financing, which is described in more detail in the debt section.

SOLID MARKET POSITION

Management reports that there has not been a shift in market share, which is estimated between 35%-36% of the primary service area. The main competitor in the service area is University, which maintains a closed medical staff. Inpatient volumes have declined, though the trend is level when combined with observations days. Mon General Hospital has robust cardiology and cardio thoracic programs and performed 2,500 cardiac catheterizations last year and close to 400 open heart procedures, in both cases volumes exceeding those at University. Mon Health launched a trans-aortic valve replacement program (TAVR) 18 months ago, the only such program in the state, which is now fully operational with 20 procedures performed to date. TAVR is a minimally invasive procedure intended for patients who could not tolerate the stress of open-heart surgery and is expected to further increase cardiac volumes.

GOOD COVERAGE AND MODERATING DEBT LOAD

Fitch's main concern had been the system's elevated leverage, which declined over the last several years. As part of the Preston acquisition, Mon Health agreed to guarantee the construction loan for the new facility, which is estimated to cost up to a maximum of $38.5 million. The construction loan was provided by a commercial bank (Wesbanco Bank Inc., Wesbanco), with Mon Health obligated group as the guarantor. Permanent financing for the facility will be provided by two sources: $26 million USDA 35-year loan which is expected to close in May 2015 and will not be guaranteed by the system, and the balance, currently estimated up to a maximum of $12.5 million, will be retained by Wesbanco as a loan with 25-year maturity and will be guaranteed by the system. Through Dec. 31, 2014, a total of $24.8 million had already been draw down of the construction loan. MADS as estimated by the underwriter is $10.45 million and includes estimated Preston debt service. Coverage of pro forma MADS by EBITDA was 3.7x in fiscal 2014 and 4.5x though the six-month 2015 interim period. However, pro forma MADS as percent of fiscal 2014 revenue continued to be somewhat elevated at 3.5x, higher than the 'A' median of 3.1x. Mon Health has made a significant investment in its plant and has relatively modest capital investment needs over the near term not exceeding its depreciation expense, and Fitch expects leverage to gradually decline.

DEBT PROFILE

In March 2012, Mon Health converted the series 2008A and 2008B bonds to a bank-rate mode. The bonds were purchased by JPMorgan and the rate is at an indexed floating rate for an initial term of seven years. The bonds retain their original amortization and maturity. Total outstanding debt, with the full Preston debt, is approximately $160.5 million with 60%/40% fixed to variable rate mix. Mon Health has three swaps outstanding with a notional par of $49.8 million and mark to market of negative $15.7 million at Dec. 31, 2014. There are no collateral posting requirements on the swaps.

DISLOSURE

Mon Health covenants to disclose annual audited financial statements within 120 days of the end of its fiscal year and quarterly financial statements within 45 days of the end of the quarter (60 days after the end of the last quarter).

For additional rating information, please see the press release 'Fitch Affirms Monongalia Health System's (WV) Revs at 'A-'; Outlook Stable' dated Feb 18, 2015.

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

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2014;

--'Revenue-Supported Rating Criteria', dated June 16, 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=981834

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Contacts

Fitch Ratings
Primary Analyst
Eva Thein
Senior Director
+1-212-908-0674
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stephen Friday
Associate Director
+1-212-908-0384
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Eva Thein
Senior Director
+1-212-908-0674
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stephen Friday
Associate Director
+1-212-908-0384
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com