CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating on the following Halifax Hospital Medical Center bonds, issued on behalf of Halifax Health (Halifax):
--$112 million series 2015;
The bonds are expected to price the week of April 13 via negotiation, and will be used to refund a portion of the existing series 2006A bonds and pay costs of issuance.
In addition, Fitch has upgraded the rating on the following bonds:
--$169.6 million series 2006A to 'BBB+' from 'BBB';
--$105 million series 2006B1-2 to 'BBB+' from 'BBB';
--$70 million Series 2008 to 'BBB+' from 'BBB'.
The rating on the series 2008 bonds is an underlying rating; the bonds are supported by a direct-pay letter of credit (LOC) with JPMorgan Chase Bank (rated A+/F1, Outlook Stable by Fitch).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by an obligated group pledge of gross revenues, property, and all other collateral held by or pledged to the master trustee excluding ad valorem tax revenue.
KEY RATING DRIVERS
FINANCIAL PROFILE IMPROVMENT: The upgrade to 'BBB+' is driven by sustained improvement in operating cash flow through the four-month interim period ended Jan 31, 2015, well ahead of expected results. Through the interim period Halifax produced a 14% operating EBITDA margin, well ahead of its 11% budget and well ahead of prior years. Improved results should be sustained via ongoing expense control efforts as well as via successful growth into a broader service area for targeted services.
STABILIZED LIQUIDITY: The upgrade to 'BBB+' is further supported by Halifax's balance sheet strength, which remains healthy for the category despite the sizeable $85 million settlement payment in March 2014. Liquidity has evidenced some recovery to $344.5 million and 279.7 days of cash on hand (DCOH) and a 15.3x cushion ratio as of Jan. 31, 2015. Further, the pro forma debt structure remains conservative with 80% fixed-rate mix and a now-frozen pension plan (frozen effective Oct 1, 2013). Fitch views the organization's unrestricted balance sheet reserves as a primary credit strength.
DEBT BURDEN REMAINS ELEVATED: The organization's pro forma debt burden remains elevated, though post-issuance maximum annual debt service (MADS) will decline slightly to $22.5 million. MADS represented 4.5% of total revenues as of Jan 31, 2015, which was higher than Fitch's 'BBB' category median of 3.6%. MADS coverage by EBITDA and operating EBITDA of 3.5x and 3.2x at Jan. 31, 2015 compare favorably to Fitch's 'BBB' category medians of 2.6x and 2.3x, respectively.
LEADING MARKET SHARE: As the safety net provider for the county, Halifax maintains leading share in its primary service area (PSA) with 65% as of Dec. 31, 2014. The next closest competitor, Florida Hospital-Memorial (FH, part of Adventist Health System/Sunbelt; rated 'AA'; Outlook Stable), has an approximate 35% market share position. However, its position as the safety net provider for the county exposes Halifax to a high level of Medicaid, equal to 15.2% of gross revenues through Jan. 31, 2015.
DISTRICT TAXING AUTHORITY: Halifax is a taxing district with the authority to levy up to 4 mills, which provides significant cushion against unexpected operating volatility. However, the district continues to deliberately reduce its reliance on tax revenue. The rate was 1 mill in fiscal 2014 ($12.5 million gross) and will remain at 1 mill for fiscal 2015 (est. $13.1 million gross). The levy is not subject to voter referendum.
RATING SENSITIVITIES
STEADY OPERATIONS: Fitch anticipates Halifax will maintain solid operating performance, which reflects improvement over prior years (even excluding settlement costs) and exceeds 'BBB' category median levels. Further, liquidity metrics are expected to remain strong against manageable capital needs near $18 million in fiscal 2015, supported by a budgeted operating EBITDA of $59 million (12% margin).
CREDIT PROFILE
Halifax Hospital Medical Center (d/b/a Halifax Health) is a health system serving northeastern Volusia County, Florida. Halifax Health operates a 568-bed referral hospital in Daytona Beach, an 80-bed community hospital in Port Orange, and a 30-bed behavioral health center two miles north of its main campus in Daytona Beach. Total revenues in fiscal 2014 (year-ended Sept. 30) were $486 million.
Fitch's analysis is based on the consolidated entity. The obligated group represented approximately 84% of total assets and 89% of total operating revenues in fiscal 2014.
OPERATING IMPROVEMENTS
Halifax has generated dramatic improvement in operating performance, due in large part to successful expense management as well as some clinical service growth. Absent the $106 million in total settlement-related costs in fiscal 2014, Halifax reduced its expense base by 1.7% against net patient revenue growth of 2.9%. The system realized approximately $14 million in operating margin improvements in fiscal 2014, via pension freeze, contract pharmacy, supply savings, and service expansion. Management has also identified $24 million in net improvements over three years (2016-2018), which it is on track to achieve.
Through the four-month interim period ended Jan. 31, 2015, Halifax produced a healthy $9.7 million in operating income (5.8% margin), which includes approximately $4.4 million in ad valorem tax revenues and remains well ahead of budget. Going forward, Halifax is expected to limit its reliance on the tax levy, and should maintain significant cushion between the current 1 millage rate and the 4 maximum. Rather, continued focus on expense control coupled with targeted growth within its service area and supported by its safety net position, should allow for steady operating performance going forward in the face of pressures on Medicare and Medicaid reimbursement (representing 61% of gross revenues).
PRO FORMA DEBT PROFILE
Following the series 2015 refunding issuance, Halifax's pro forma debt burden will remain elevated, though MADS will decline to $22.5 million from $22.8 million. No additional debt is currently planned, and Halifax is expected to maintain an adequate level of capital spending without debt issuance going forward. Its average age of plant was 11.5 years in fiscal 2014, against Fitch's 11.1 year 'BBB' category median.
Post issuance, Halifax will have approximately $350.1 million in outstanding debt, including $280.1 million in fixed-rate bonds and $70 million in floating-rate debt (weekly reset) secured by an LOC. The $70 million in series 2008 variable rate demand bonds are secured by a direct-pay LOC with JP Morgan Chase, with a Nov. 17, 2015 term. Halifax has a $70 million swap against its floating-rate debt with counterparty Citigroup, with no collateral posting threshold. As of Jan 31, 2015 the mark-to-market was $39 million.
DISCLOSURE
Halifax covenants to provide audited disclosure within 120 days and quarterly disclosure within 45 days of period end to the Municipal Security Rulemaking Board's EMMA system. Disclosure to Fitch has been timely and thorough, and includes a management discussion and analysis, as well as medical staff, utilization, and service area economic data, which Fitch notes is best practice.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014)
'Revenue-Supported Rating Critera' (June 16, 2014)
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
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=982498
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