Fitch Affirms Gwinnett Hospital System's (GA) Revs at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed its 'A+' rating on the following outstanding Hospital Authority of Gwinnett County, Georgia revenue anticipation certificates (RANs), series 2007A-D listed below, issued on behalf of Gwinnett Hospital System, Inc. (Gwinnett):

--$31,835,000 (Gwinnett Hospital System, Inc. Project), series 2007A;

--$30,710,000 (Gwinnett Hospital System, Inc. Project), series 2007B;

--$18,830,000 (Gwinnett Hospital System, Inc. Project), series 2007C;

--$59,100,000 (Gwinnett Hospital System, Inc. Project), series 2007D.

The Rating Outlook is Stable.

Fitch does not rate the system's 2011 and 2013 series.

SECURITY

The revenue certificates are secured by gross revenues of Gwinnett Hospital System, Inc. as the sole obligated group (OG) member. The OG accounted for 94.2% of the consolidated Gwinnett Health System, Inc. and Affiliates 2015 revenues and 96.7% of the consolidated system assets.

KEY RATING DRIVERS

LEADING MARKET SHARE: Gwinnett continues to see strong volumes leading to solid revenue growth, and is the market leader in its primary service area with a 41.3% market share. A proposed merger with Northside Hospital (Northside; an 852-bed provider with three acute care hospitals) would likely strengthen Gwinnett's position in the north Atlanta market given the movement towards value based reimbursement and population health management models.

PRESSURED PROFITABILITY: Gwinnett's profitability has been pressured for the last three years due to its strategic investment in the employed physician group, which is outside of the OG (Fitch bases its metrics on the consolidated system performance). The consolidated system's operating and operating EBITDA margins in fiscal 2015 (draft audit, year-end June 30) were 1.1% and 8.1%, respectively.

SOLID LIQUIDITY: The $440.9 million of cash and unrestricted investment at June 30, 2015 are solid for the rating level, translating to days cash on hand (DCOH) at 239.7 days, cushion ratio at 21.2x and cash to debt at 151.7%, all exceeding Fitch's 'A' category medians.

MANAGEABLE DEBT BURDEN: Gwinnett's debt burden, which had been somewhat elevated as a result of investment in facilities in response to what had been robust population growth and investment in physician alignment, is now consistent with the rating category; maximum annual debt services (MADS) was reported at 4x in 2015 and MADS is moderate at 2.9% of revenues.

RATING SENSITIVITIES

PROPOSED MERGER WITH NORTHSIDE HOSPITAL: On Sept. 2, 2015, Gwinnett Health System and Northside Hospital signed a letter of Intent (LOI) to merge the two organizations. While the merger impact has not been incorporated into Fitch's rating, based on limited financial information on Northside available, Fitch believes that the transaction could potentially be accretive to Gwinnett Hospital System, Inc.

MAINTAINING SUFFICIENT PROFITABILITY: Fitch expects Gwinnett Hospital System, Inc.'s credit profile to remain stable and in line with Fitch's 'A' category medians, with solid coverage and liquidity offsetting the slimmer than category median margins.

CREDIT PROFILE

Gwinnett operates a health care system which consists of Gwinnett Medical Center (353 acute care beds), located in Lawrenceville, GA; Gwinnett Medical Center-Duluth (81 acute care beds and 30 acute rehab beds), located in Duluth, GA; and an 89-bed skilled nursing facility in Lawrenceville. Gwinnett Hospital System, Inc. is the only member of the OG, which accounted for 94.2% of the consolidated 2015 system revenues and 96.7% of the consolidated assets. The only material entity outside the OG is the Gwinnett Medical Group, Inc. (GMGI), the employed physician group. The consolidated system had total revenue of $715 million for the fiscal year ended June 30, 2015 (draft audit).

Proposed Merger

Northside was chosen based on the geographic proximity of their markets in the growing greater north Atlanta area, where Northside has three acute care hospitals with locations in Fulton, Cherokee and Forsyth counties. Equally important is their complementary array of clinical strengths; Gwinnett has an open heart program, trauma and sports medicine services, while Northside has a large oncology program and robust women's services; it is reported to be the number one community hospital in the U.S. in terms of newborn deliveries. The transaction, currently contemplated to be a merger, must still receive regulatory approvals, including Hart-Scott-Rodino review. The current time frame calls for closing in early 2016. Fitch will review the impact of the transaction when details of the structure are available.

Gwinnett continues to hold a leading share of its primary service area, which includes Gwinnett and Barrow Counties, of 41.3%, supported by solid volumes - inpatient admission increased by 4.3% in 2015. The open-heart program launched in January of 2012 has grown and Gwinnett performed 400 open heart surgeries in the last fiscal year, and further expanded its cardiology program by adding electrophysiology service last year.

Pressured Profitability

The consolidated system revenues continued to grow in the last two years - 12.1% in fiscal 2014 and 5.2% in fiscal 2015, but margins have been thin, primarily due to the substantial subsidy to GMGI, which is an important factor in the solid utilization trend and revenue growth. Operating income was reported at $7.6 million in fiscal 2015, equal to an operating margin of 1.1% and operating EBITDA margin of 8.1%, lower than the category medians of 3.6% and 10.3%, but $3 million improved YOY and $4 million ahead of budget.

The operating income budget for 2016 is near breakeven, assuming a $3 million reduction in DSH and UPL payments. A consulting firm was engaged in the spring of 2015 with a mandate to review the revenue cycle. In particular, the system wants to return DAR's to the 50 days range, which spiked up following a 2013 billing platform conversion. Consultants have also been engaged to perform a review of the physician practices, all of which should result in opportunities to improve profitability.

Debt Profile

Gwinnett has a moderate debt burden with coverage of MADS by EBITDA of 4x in 2015 and MADS constituted 2.9% of revenues, both of which are consistent with Fitch's 'A' category medians of 4.2x and 2.8%, respectively. The organization has close to 48% of long-term debt in fixed-rate mode after the conversion to fixed rate of the 2007A-D variable-rate certificates. Gwinnett has two direct bank loans not rated by Fitch; the series 2011 has an August 2020 mandatory put date and the series 2013 has a June 2020 mandatory put date. The four swaps, which were originally used to hedge the series 2007 variable-rate certificates, remain outstanding with a notional par of $140.4 million and a June 30, 2015 negative mark-to-market valuation of negative $36.7 million. Collateral posting levels are $15 million and $40 million for the two counterparties, respectively, and no collateral is being posted.

The organization does not have any large capital investment plans for the immediate future, with the capital budget in the mid-$40 million range for the next five years, equating to approximately 120% of budgeted depreciation expense. Included in the plan is the renovations of a women's pavilion, which would expand the much needed NICU space and enable Gwinnett to increase its obstetrical volumes.

Disclosure

Gwinnett releases audited financial statements within 150 days of fiscal year end and posts quarterly statements within 60 days of the end of each quarter on EMMA.

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

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991738

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991738

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Eva Thein
Senior Director
+1-212-908-0674
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analysts
Emily Wadhwani
Director
+1-312-368-3347
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Eva Thein
Senior Director
+1-212-908-0674
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analysts
Emily Wadhwani
Director
+1-312-368-3347
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com