NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the approximately $115 million series 2016 hospital revenue and refunding bonds expected to be issued by the Economic Development Authority of Stafford County on behalf of the Mary Washington Healthcare Obligated Group.
Fitch also affirms the following outstanding bonds at 'BBB+':
--$56,210,000 Economic Development Authority of the City of Fredericksburg (Mary Washington Healthcare VA hospital facilities revenue refunding bonds series 2014;
--$30,405,000 Economic Development Authority of the City of Fredericksburg (Mary Washington Healthcare), VA hospital facilities revenue refunding bonds series 2013A;
--$51,030,000 Economic Development Authority of the City of Fredericksburg (MediCorp Health System), VA hospital facilities revenue refunding bonds series 2007;
--$123,480,000 Economic Development Authority of Stafford County (MediCorp Health System), VA revenue bonds series 2006.
The Rating Outlook is Stable.
The series 2016 will be issued as fixed rate bonds and proceeds will be used to refund the outstanding series 2006, with the exception of the 2016 maturity, currently outstanding in the amount of $112.3 million. The refunding is a matched maturity refunding with final maturity in December 2037. A debt service reserve fund (DSRF) will not be funded. The refunding is expected to generate net present value savings estimated at $18.7 million. Maximum annual debt service (MADS) of $19.7 million, assuming the refunding, was provided by the underwriters. The bonds are expected to sell via negotiation the week of April 18th.
The bonds are secured by gross revenues of the MWHC obligated group which accounted for 86% of consolidated system revenues and 97% of the system assets in fiscal 2015 (Dec. 31 year-end). Fitch reports on the results of the consolidated system.
KEY RATING DRIVERS
MAINTAINING IMPROVED OPERATING RESULTS: Despite flat system revenues over the last couple of years, in fiscal 2015 the system has maintained the improved performance resulting from the significant financial turnaround in the prior year. Fiscal 2015 ended with operating income of $18.9 million, equal to operating and operating EBITDA margins of 3.3% and 12.3% respectively, stronger than Fitch's 'BBB' rating category medians of 0.6% and 7.7%. The solid performance was the result of the organization continuing to reap the benefits of the efficiencies and cost reductions implemented in 2014 and much higher cash flow from Stafford Hospital (Stafford), which is experiencing solid volumes.
LEADING MARKET SHARE: The system's market share is being maintained at the dominant 61% in the demographically favorable eight-county primary services area (PSA), located approximately half way between Richmond, VA and Washington, D.C. A slight decrease in market share of the Mary Washington Hospital (Mary Washington) is being offset by an uptick in Stafford's market share, where admissions increased by 19% over the last two years, partially resulting from the agreement with Kaiser Permanente (Kaiser) to offer their members access to Stafford, but as well from organic growth.
GROWING LIQUIDITY: Unrestricted cash and investments increased to $230.2 million at Dec. 31, 2015 from $173 million at 2012 fiscal year-end, equating to 161 days cash on hand (DCOH) and cushion ratio of 11.7x, both consistent with Fitch's 'BBB' medians, and cash to debt ratio of 81%, now closer to the 89.5% Fitch median.
MODERATE DEBT LOAD: Coverage of maximum annual debt service (MADS) by EBITDA improved to a solid 4x in fiscal 2015, better than the 'BBB' median and MADS represented a manageable 3.4% of system revenues. The system has a conservative debt structure with 85% fixed-rate debt and no swaps and has no major capital needs in the foreseeable future.
CONTINUED IMPROVED OPERATING PROFILE: Fitch expects MWHC to maintain its improved operating profile. Given the system's solid coverage and relatively manageable capital investment needs, Fitch expects liquidity to further improve closer to Fitch's 'A' medians, which could lead to positive rating pressure.
MWHC is the parent of a group of health care-related organizations including Mary Washington Hospital (Mary Washington), a 437-licensed bed acute care hospital located in Fredericksburg, VA, and Stafford Hospital (Stafford), a 100-bed acute care hospital located in Stafford, VA. Revenues for the system totaled approximately $581.4 million in 2015.
MAINTAINING IMPROVED OPERATING RESULTS
The improved operating results were accomplished despite the fact that revenues were static over the last two years, with performance benefiting from realization of the expense reductions implemented in 2014 and the much higher EBITDA contribution from Stafford in fiscal 2014 and 2015. The fiscal 2015 operating income of $18.9 million was a slight increase over the $15.3 million in 2014 and the 2015 operating margin at 3.3% exceeded budgeted 2.8%. The 2015 revenues and market share at Mary Washington were impacted by a loss of a neurosurgeon, who was replaced mid fiscal 2015, and pick up in market share is reported to be already evident in the 2015 fourth quarter.
Management is focused on growth and several initiatives projected to be accretive to revenues are in progress. These include opening a cancer center in Montross in Virginia's North Neck Region, which will provide care to patients previously having to travel to Richmond, exploring expanding the scope of services offered to Kaiser patients at Stafford, as well as growing and leveraging its clinically integrated provider network - Mary Washington Health Alliance, which has an Accountable Care Organization designation and participates in a narrow network product which is competitively priced on the exchange. The budget for fiscal 2016 is for $15 million operating income, 2.6% operating margin, conservatively based on a modest 1.1% increase in revenues, which Fitch believes is achievable.
LEADING MARKET SHARE
The system has maintained market share of approximately 61%, with Stafford increasing to 10.8% from 8% three years ago. The dominant market share compares to the for-profit Spotsylvania Hospital's share of 12%. Mary Washington is the only provider of tertiary services in its market, including open-heart surgery. The only outmigration is for some cancer, cardiac, high-end pediatrics and high-end quaternary services, such as transplants. Overall admissions for the system were slightly lower last year, but Stafford is seeing a consistent growth in admissions - 1.6% in 2015 and close to 30% since 2012 and near doubling of births since entering into the Kaiser relationship in January 2014. It is expected that volumes will also benefit from the opening of the Montross Cancer Center. The system's service area continues to exhibit strong economic and demographic characteristics and the opening of Stafford in 2009 has enabled the system to benefit from the well-insured suburban growth to the north.
DEBT AND LIQUIDITY METRICS IMPROVED
MWHC's debt metrics have materially moderated over time and MADS coverage by EBITDA at 4x and MADS as percent of revenues at 3.4% compare favorably to Fitch's 'BBB' medians of 2.7x and 3.6%. Liquidity has likewise shown solid growth and is now consistent with the rating category. Fitch expects liquidity to further improve based on the steady cash flow and modest capital investment needs. There are no significant capital needs anticipated in the near to medium term, with projected capital spending approximating depreciation expense over the next five years with a third dedicated to IT.
The system has a conservative debt structure with 85% fixed rate long-term debt post issuance and no swaps. Pro forma MADS is $19.7 million and debt service is relatively level. The $30.4 million series 2013A is variable rate without liquidity facility and has a 2017 renewal date. The system executed a direct bank loan ($10.7 million outstanding) in 2015, which Fitch does not rate. The loan has a 2035 final maturity with a 2020 renewal date.
MWHC covenants to provide audited annual financial statements and quarterly disclosure to bondholders.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
Dodd-Frank Rating Information Disclosure Form