NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'BB+' rating on approximately $94.2 million of series 2014 revenue bonds issued by Decatur Hospital Authority (TX) on behalf of Wise Regional Health System (WRHS).
The Rating Outlook is Stable.
SECURITY:
Bond payments are secured by a pledge of gross revenues of the authority's hospital facilities, a fully funded debt service reserve fund, and a first lien on certain mortgaged property and land on which hospital facilities are located.
KEY RATING DRIVERS
HIGH LEVERAGE AND MIXED LIQUIDITY: The major factor for the below investment grade (BIG) rating is Wise's high debt load with maximum annual debt service (MADS) of $9.1 million equal to 4.4% of revenues. Cash and unrestricted investments of $50.2 million at Dec. 31, 2014 translate to a weak 38% cash-to-debt ratio, lower than Fitch's BIG median of 56%, but days cash on hand (DCOH) at 103.2 days is better than the median. EBITDA coverage of MADS was adequate at 3.5x.
SOLID PROFITABILITY: While somewhat lower than in the prior year, profitability was still solid in fiscal 2014 (year-end Dec. 31) with operating margin of 6.4% and operating EBITDA margin of 14.6%. Profitability was compressed due to the startup expenses and lease payments of the new Parkway Surgical and Cardiovascular Hospital (Parkway), which opened in May 2014, as well as depreciation expense associated with the purchase of the WRHS Bridgeport facility in 2013.
LEADING MARKET SHARE: WRHS's market share in its Primary Service Area (PSA) increased to 57.1% from 56.5% in 2013. No other single hospital has a market share greater than 10% in the PSA. Fitch views the system's strong market presence, bolstered by the opening of the 12-bed Parkway in 2014, as a credit positive.
EXTENSIVE CAPITAL PLANS: The system is constructing a $13 million rehabilitation and sports medicine facility on the main Decatur East campus, partially funded with $10 million of new money from the series 2014 issuance. There may be additional expansion plans in the near- to medium-term, the largest of which is the addition of a new bed tower to the current East Campus, but the plans are dependent on assessment of debt capacity.
RATING SENSITIVITIES
LITTLE CAPACITY FOR ADDITIONAL DEBT: Fitch believes WRHS does not have capacity for additional debt at the current rating level. Any additional debt would be expected to be complemented with a commensurate increase in liquidity.
CREDIT PROFILE
WRHS is a healthcare system located in Decatur, TX and owned and operated by the Decatur Hospital Authority. The authority is not a taxing district and the system is not supported by tax collections. WRHS operates a 134-bed general acute care hospital which is split into two campuses, the West Campus and the East Campus, in Decatur, TX. In addition, WRHS operates a campus in Bridgeport, TX, as an outpatient facility and in May 2014 opened its new 12-bed Parkway Surgical and Cardiovascular Hospital in Fort Worth, TX. WRHS reported $202.3 million in total revenues in fiscal 2014.
SOLID PROFITABILITY
WRHS reported operating income of $13.9 million in fiscal 2014, equal to an operating margin of 6.4% and operating EBITDA margin of 14.6%, significantly above the BIG category medians. WRHS benefits from the contributions from the Texas Medicaid 1115 Waiver program, which is set to expire in 2016, with no certainty of whether or in what form it may be extended beyond that time. In fiscal 2014 WRHS received $20.3 million from the supplemental payments under the program. The 2014 results were lower than the $21.8 million operating income in the prior year due for several reasons, including the start-up expenses of Parkway and Parkway's somewhat lower than budgeted profitability, as well as the opening of two imaging centers and the higher capital costs associated with Parkway and the Bridgeport facilities. Management has budgeted operating income of $13.6 million, consistent with the most recent fiscal year.
WRHS is participating in A Texas Nursing Facility Upper Payment Limit Supplemental Program (NFUPL) program, which allows nursing homes to receive additional Medicaid funds. WRHS leases 13 nursing homes under the program which are being managed by existing operators through management agreements. By virtue of the lease agreements, each long-term care facility qualifies as a 'non-state-government operated nursing facility' and is then eligible to receive higher reimbursement payments which are then shared with WRHS. WRHS received $1.1 million under the program in 2014 and expects to receive approximately $6 million-$7 million before the program sunsets in 2016.
The Parkway facility opened in mid-2014 with 12 inpatient beds and four operating rooms, and operates what is essentially a specialized surgical facility focusing on orthopedics, neurology and spine surgery. While it is located closer to the Dallas-Fort Worth Metroplex than the WRHS main Decatur campuses and within close proximity to two full service hospitals, the 'surgical niche' nature of this facility and the convenient practice setting it offers to surgeons insulates it somewhat from this much more competitive marketplace. Parkway lost $2.4 million in 2014 due to the startup expenses and higher cost of certain surgical implants, but management reports that it was profitable in each of the last six months and has a favorable payor mix, with significant percentage of revenues from commercial payors.
Management has decided to relinquish the inpatient license for Bridgeport, located only 12 miles from the main WRHS campus, and to consolidate surgical services at the Decatur East campus, which should significantly reduce expenses as this location is now being more appropriately operated solely as an outpatient facility and urgent care clinic. Space may also be used for certain back office functions, thereby freeing up much needed capacity at the main Decatur campus.
LOW, BUT IMPROVING LIQUIDITY
WRHS's cash position has materially improved over the last few years, with unrestricted cash and investments more than doubling to $50.2 million at Dec. 31, 2014 from $22.4 million in fiscal 2011. At 2014 year-end the system's reported cash and unrestricted investments equated to 103.1 DCOH, above the BIG median of 74.8 days, and cushion ratio of 5.5x, consistent with the median. Fitch's calculation of DCOH eliminates the expenses of the nursing homes in the NFUPL program, as WRHS is not liable for expenses beyond the management fees, which are paid from the nursing home revenues. Management has budgeted an increase in DCOH to 125 days by end of fiscal 2015.
DEBT PROFILE
The 2014 issuance increased leverage, resulting in a stressed 37.9% cash-to-debt, below the 55.7% category median, and 5.5x cushion ratio. The system has a conservative debt structure with all fixed-rate debt and coverage of MADS was an adequate 3.5x in fiscal 2014. MADS as a percent of revenues has moderated slightly but at 4.4% is still unfavorable compared to the BIG median of 4%.
EXTENSIVE CAPITAL PLANS
A current project is to construct a 69,000 square foot rehabilitation and sports medicine facility adjacent to the main Decatur East Campus. The $13 million cost will be partially funded from $10 million available in escrow from the series 2014 issuance, with the rest to be generated from operating cash-flow. Construction will commence this month and completion is projected for June 2016. WRHS has exhibited a fairly aggressive growth strategy in recent years, and has substantial capital plans in the medium term to accommodate the steady population growth. Management had discussed plans for a possible second tower to be built on their East Campus in as soon as three years. The approximate cost of the project could be as high as $62 million, $22 million of which is expected to be generated from cash flow, which would be further dilutive to the system's leverage metrics. Fitch acknowledges the necessity of such expansion projects, but notes that WRHS's current financial profile does not have capacity for additional debt at the current rating level.
CONTINUING DISCLOSURE
WRHS covenants to provide annual disclosure of audited financials within four months of the fiscal year end and quarterly disclosure of interim financials within 45 days of the quarter end. Annual and quarterly disclosure reports are filed on the Municipal Securities Rulemaking Board's EMMA Web site.
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;
--'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=984448
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