NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' rating on the following Christian County Hospital Revenue and Refunding Bonds issued on behalf of Jennie Stuart Medical Center (JSMC):
--$60.1 million series 2006A.
The Rating Outlook is Negative.
SECURITY
The bonds are secured by the gross revenues of JSMC, and are further secured by a mortgage on hospital property and a debt service reserve fund.
KEY RATING DRIVERS
WEAK BUT IMPROVING PERFORMANCE: JSMC reported a negative 7.4% operating margin in 2014. The negative performance is attributed to volume declines, reimbursement challenges, and a number of one-time expenses in the first half of the year. JSMC was able to improve operations in the second half of 2014, and has posted a positive bottom line for the last eight rolling months. Operating margin was 0.7% through the four-month interim period (ended April 30, 2015), slightly below Fitch's 'BBB' median of 1.1%.
ADEQUATE LIQUIDITY: JSMC's 165 days cash on hand (DCOH), a 9.5x cushion ratio and 79% cash-to-debt at Dec. 31, 2014, were sufficient compared to Fitch's 'BBB' medians of 145 days, 10.5x and 93.6%, respectively.
ELEVATED DEBT BURDEN: JSMC's debt burden remains elevated with maximum annual debt service (MADS) as 4.8% of 2014 revenues, compared to the category median of 3.6%. Additionally, negative operations in 2014 resulted in a very low 1.0x debt service coverage, according to Fitch's calculations. Coverage was a much improved 2.6x through the interim period, equal to Fitch's 'BBB' median.
STABLE MARKET POSITION: JSMC's market share in its primary service area (PSA) has remained consistent at over 50%, and is a primary credit strength. However, the service area remains economically challenged, as JSMC's payor mix consisted of 20.4% Medicaid and 4.9% self-pay in 2014.
RATING SENSITIVITIES
MAINTANENCE OF THE NEGATIVE OUTLOOK: The maintenance of the Negative Outlook reflects concerns about the impact that continued inpatient volume declines and reimbursement pressures will have on operating profitability going forward. Material deviation from budget would likely prompt further negative rating pressure.
SUSTAINED OPERATING IMPROVEMENT EXPECTED: Fitch expects Jennie Stuart Medical Center's operating improvement to continue through 2015 and beyond. Management has budgeted for a 1.4% operating margin in 2015, which Fitch expects it to achieve, though it will require further improvement from interim results. Adherence to budget would prompt the revision of the Outlook to Stable.
CREDIT PROFILE
JSMC is a 194-licensed bed inpatient acute care hospital located in Hopkinsville, Kentucky, approximately 70 miles north of Nashville, Tennessee. JSMC had total operating revenues of $109.2 million in 2014.
PRESSURED PROFITABILITY
JSMC's $8 million loss from operations equated to a negative 7.4% operating margin in 2014. The operating loss is attributed to a number of one-time expenses in the first half of 2014 related to a sizable reduction in force, as well as a cost settlement payment to one of Kentucky's Medicaid Managed Care providers. The one-time expenses totaled approximately $4 million. Additional revenue pressure is attributed to the continued shift of volumes from inpatient to outpatient (nearly all inpatient volumes declined in 2014), as well as challenges in receiving timely and accurate payments from the state's managed care organizations.
Operations improved in the second half of 2014 and JSMC posted a $2.6 million operating income as of April 30, 2015 on a rolling eight-month basis. Operating income was $224,000 through the four-month interim period, which equated to an 11.7% operating EBITDA margin, ahead of Fitch's median of 7.9%. Fitch expects the positive operating trend to continue through the remainder of the year and for JSMC to meet its budgeted goal of a 1.4% operating margin in 2015.
ADEQUATE LIQUIDITY
JSMC's $49.3 million in unrestricted cash and investments at Dec. 31, 2014, equated to a solid 165 DCOH, compared to Fitch's median of 145 days. Liquidity metrics in relation to debt continue to be below category medians, but have improved over the last four years. Cash-to-debt of 79% and cushion ratio of 9.5% were both improved from 56% and 7.5% at Dec. 31, 2011. Although JSMC had a significant operating loss and a number of large one-time expenses in 2014, it was able to sustain its liquidity position through the challenged year. Fitch expects JSMC to produce positive operating results in 2015 and beyond, which should help grow its cash position over the medium term.
ELEVATED DEBT BURDEN
JSMC's debt burden has moderated somewhat over the last four years as evidenced by MADS as a percent of revenue of 4.8% in 2014, against 5.5% in 2011. However, due to JSMC's modest revenue base, the metric still remains unfavorable to Fitch's 'BBB' category median of 3.5%. In addition, the 2014 operating loss contributed to very low debt service coverage of 1.0x, according to Fitch's calculation. There was no coverage covenant breach in 2014, as JSMC's covenant calculations deduct amounts set aside for payment of debt service in escrow from the MADS. JSMC's covenant calculations reported MADS debt service coverage of 1.3x for 2014. Coverage returned to a much stronger 2.6x through the interim period, and was in line with the 'BBB' median of 2.6x.
DEBT PROFILE
All of JSMC's debt is fixed rate. JSMC has an outstanding basis swap with Bank of America in the notional amount of $60.1 million. The mark-to-market on the swap was $2 million at April 30, 2015, and there is no collateral posting requirement if DCOH is above 95 days.
CONTINUING DISCLOSURE
JSMC covenants to disclose audited annual information within 150 days of fiscal year-end to the Municipal Securities Rulemaking Board's EMMA system. JSMC also discloses quarterly statements to EMMA, and Fitch notes that disclosure has been timely and thorough.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986422
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986422
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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