Fitch Affirms Beatrice Community Hospital's (NE) Revs at 'BB+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'BB+' rating on the following Hospital Authority No. 1 Gage County, Nebraska bonds, issued on behalf of Beatrice Community Hospital (BCH):

--$30 million health care facilities revenue bonds, series 2010B.

BCH also has $9.9 million in series 2015 direct placement bonds which are not rated by Fitch.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues, a mortgage lien, and a debt service reserve.

KEY RATING DRIVERS

HEALTHY CASH FLOW: Good clinical growth and volumes supported solid cash flow in fiscal 2014 and interim fiscal 2015. BCH produced a 5.8% operating and 18.7% operating EBITDA margin in fiscal 2014, which was sufficient to provide 3.3x coverage of maximum annual debt service (MADS). This trend continued through the five-month interim period ended Feb. 28, 2015 with a 17% operating EBITDA margin and 3.1x coverage, both above Fitch's respective 'BBB' category medians of 7.9x and 2.3x.

MODEST BALANCE SHEET GROWTH: As of Feb. 28, 2015, BCH's unrestricted cash and investments was $21.3 million, equal to 131.6 days of cash on hand (DCOH), a 5.6x cushion ratio, and 51.4% cash-to-debt. While consistently improved over a low 78.2 DCOH and 20.1% cash-to-debt at fiscal 2012, these ratios remain well below Fitch's 'BBB' category medians of 145, 10.5x, and 93.6%. Meaningful improvement over the near term may be hampered by BCH's capital expenditures.

CAPITAL PROJECT UNDERWAY: A $7.2 million medical office and ambulatory expansion project is expected to break ground in April 2015, funded via operating cash flow, to be completed in summer 2016. The project will include needed space to expand certain services including women's and children's, and other ambulatory physician clinic space. Otherwise, routine capital needs are anticipated to remain modest at under $1 million annually over the near term.

ELEVATED DEBT BURDEN: BCH remains significantly leveraged, as evidenced by debt to capitalization of 50.6% and MADS equal to 5.7% of revenue in fiscal 2014, both unfavorable to Fitch's 'BBB' category medians of 44.9% and 4%, respectively. Fitch expects this will continue to moderate over time as a result of continued revenue growth and no plans for additional debt.

CRITICAL ACCESS DESIGNATION: BCH's operating performance continues to be bolstered by the associated supplemental revenues afforded by its critical access hospital (CAH) designation. Further, BCH's rural location approximately 30 miles from the nearest competing hospital affords it a stable and leading market position, and a very limited competitive landscape. While the supplemental revenue provided to BCH helps to mitigate the risks inherent to small, rural facilities, Fitch notes the long-term viability of the CAH program is uncertain.

RATING SENSITIVITIES

SUSTAINED OPERATING IMPROVEMENT: Fitch expects BCH to maintain healthy operating cash flow levels which support balance sheet preservation at a minimum, and moderating leverage levels over the longer term. Upward rating movement would be considered should BCH sustain a consistent financial cushion in excess of Fitch's 'BBB' category median ratios, which Fitch believes is necessary to offset the risks inherent to its small revenue base.

CREDIT PROFILE

BCH is located in Beatrice, Nebraska approximately 40 miles south of Lincoln, Nebraska. BCH is a CAH operating 25 acute-care beds. Other entities include two HUD housing projects and a 45-unit congregate living facility. Total operating revenues for BCH were $65.9 million in audited fiscal 2014.

OPERATING IMPROVEMENTS

BCH continues to demonstrate an ability to recruit and retain medical staff, now housing 35 active staff up from 20 in 2010. This has supported sustained growth in clinical utilization and revenue; net patient revenue grew nearly 19% in fiscal 2014 over prior year, versus a 17.4% growth in total expenses. Solid operating performance has supported balance sheet growth, which should be preserved via a very conservative investment mix and capital structure. The $7.2 million cash-flow funded expansion project will require steady operating performance to protect liquidity. BCH is budgeting for steady EBITDA near 16% against 17.4% actual results through Feb. 28, 2015, and generated $12.5 million EBITDA (18.9% margin) in fiscal 2014.

DEBT PROFILE

BCH remains highly leveraged, which is expected to continue to moderate over time. Total debt was $40.8 million at fiscal 2014, which was 100% fixed rate with no swaps. In March 2015, BCH refunded its outstanding series 2010A debt with a matched-maturity direct placement. Fitch notes that the direct placement remains parity debt, with identical security and covenant thresholds. For fiscal 2014, BCH produced 3.39x coverage (1.25x required) and had 135.29 DCOH (70 DCOH required) as calculated per the indenture.

DISCLOSURE

BCH covenants to provide audited annual financial statements 150 days after the year-end close to bondholders via the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system (EMMA). Annual disclosure consists of a balance sheet, income statement, medical staff, revenue sources, and utilization statistics. Fitch views negatively the lack of a provision for quarterly disclosure, but notes that BCH has consistently provided voluntary quarterly disclosure to bondholders via EMMA. Disclosure to Fitch has been timely and thorough, with excellent access to management.

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 Criteria' (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=982542

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Contacts

Fitch Ratings
Primary Analyst
Emily E. Wadhwani
Director
+1 312-368-3347
Fitch Ratings, Inc.
70 W. Madison Street
Chicago IL 60602
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
Emily E. Wadhwani
Director
+1 312-368-3347
Fitch Ratings, Inc.
70 W. Madison Street
Chicago IL 60602
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