NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB+' rating on the following Health Care Authority of Cullman County (AL) bonds issued on behalf of Cullman Regional Medical Center (CRMC):
--$61.2 million revenue bonds, series 2009A.
The Rating Outlook is revised to Positive from Stable.
SECURITY
The bonds are secured by a pledge of revenues, mortgage, and a debt service reserve fund.
KEY RATING DRIVERS
OPERATIONAL TURNAROUND: The revision of the Outlook to Positive is driven by CRMC's significant year-over-year (yoy) operating improvement over the last four fiscal years. CRMC's operating margin of 4.2% in FY2015 was very much improved from negative 5.2% in 2012. The improvement is driven by CRMC's revenue cycle and cost containment initiatives, solid volumes, and low unemployment rate in the service area.
GROWING LIQUIDITY: CRMC's liquidity position was solid with 209.8 days cash on hand (DCOH) at FYE2015 (ended June 30, 2015), which compares well to Fitch's 'BBB' median of 161.5 days. Cushion ratio of 9.0x and cash-to-debt of 85.5% at FYE 2015 were much improved from prior years and are approaching Fitch's investment-grade medians of 11.1x and 89.5%, respectively.
SIGNIFICANT LEVERAGE: CRMC's leverage remains significant given its modest revenue base, with maximum annual debt service (MADS) equal to 5.8% of FY2015 revenues, unfavorable to Fitch's 'BBB' median of 3.6%. Somewhat offsetting CRMC's leverage is its strong debt service coverage of 2.9x in FY2015.
STRONG MARKET POSITION: CRMC's designation as a sole community provider hospital and 67% Medicare market share in its primary service area (PSA) allow CRMC to benefit from strong volumes, favorable payor contracts, and enhanced Medicare reimbursement.
RATING SENSITIVITIES
MODERATION OF DEBT BURDEN: Upward rating movement is possible, should Cullman Regional Medical Center's debt burden moderate further, which would require a sustained trajectory of improving operations and y-o-y cash growth.
CREDIT PROFILE
CRMC is an acute care general hospital with 145 licensed beds (115 operational), located in Cullman, AL, which is 50 miles north of Birmingham. CRMC is designated as a Level III trauma center and is designated as a sole community provider. CRMC had total operating revenues of $100.7 million in FY 2015.
OPERATIONAL TURNAROUND
CRMC's $4.2 million in income from operations in 2015 was significantly improved from a $4.8 million loss in 2012. Management attributes the y-o-y operating improvement to its revenue cycle initiatives, cost containment strategies, solid volume trends, and favorable area demographics which account for a low unemployment rate.
CRMC's $2.2 million in income from operations through the first quarter of FY2016 (ended Sept. 30, 2015) equated to strong 8.3% operating and 17.4% operating EBITDA margins. Management is expecting to finish FY2016 with approximately $16 million in operating EBITDA, a $2 million improvement over FY2015, which Fitch views as feasible given the current operating trajectory.
SOLID LIQUIDITY
CRMC's unrestricted liquidity grew by 73% from FYE2012 to Sept. 30, 2015, resulting in an unrestricted cash and investments balance of $52.5 million. CRMC's 210.9 DCOH, compared well to Fitch's 'BBB' median of 161.5 days, while cushion ratio of 9.0x and cash-to-debt of 84% were improved from prior years, but were slightly below Fitch's 'BBB' respective medians of 11.1x and 89.5%. Fitch would expect CRMC's unrestricted liquidity position to continue improving over the medium term given its trend of improved operating profitability and ability to grow its balance sheet over the last four years.
SIGNIFICANT LEVERAGE
CRMC's annual debt service is level through maturity in 2036, with MADS of approximately $5.8 million equating to 5.8% of FY2015 revenues, unfavorable compared to Fitch's 'BBB' median of 3.6%. Leverage has moderated slightly from FY2012 when MADS as a percent of revenue was 6.3%. However, stronger debt service coverage of 2.9x in FY2015 , improved from 1.3x in 2012, somewhat offset CRMC's leverage position, and no additional debt is expected at this time.
DEBT PROFILE
All of CRMC's outstanding debt is fixed rate. CRMC has one basis swap outstanding, with no collateral posting requirements.
DISCLOSURE
CRMC covenants to disclose quarterly unaudited (within 60 days) and annual audited (within 120 days) financial statements, including management discussion and analysis, to the Municipal Securities Rulemaking Board's EMMA System.
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=993698
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993698
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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