NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'A-' rating to the following bonds to be issued by the Randolph County Health Care Authority, Alabama:
--$21,095,000 limited obligation sales tax bonds series
--$145,000 limited obligation sales tax bonds (federally taxable), series 2016-B.
The bonds will be sold via negotiation on or about the week on April 25. Proceeds from the sale of the bonds will be used by the authority to construct a new 15-bed general hospital and related outpatient facilities to be located in the city of Wedowee.
The Rating Outlook is Stable.
The bonds are a limited obligation of the authority payable from a first lien on the proceeds of a 1% general sale and use tax levied and imposed within the county. The bonds are also secured by a debt service reserve fund (DSRF) which is expected to be funded from cash in an amount equal to maximum annual debt service (MADS) at closing.
KEY RATING DRIVERS
SATISFACTORY COVERAGE CUSHION: Estimated pledged revenue for fiscal 2015 of $1.90 million is equivalent to 1.43x projected MADS. A similar sales tax to the pledged sales tax has a volatile history, declining by 21.3% from fiscal 2007 - 2011 and exhibiting uneven growth during the economic recovery. However, estimated fiscal 2015 sales tax revenues can withstand a loss of 30% before MADS coverage would fall below 1.0x offering a satisfactory cushion against historical losses assuming no further leverage.
LENIENT ABT PROVISIONS: The trust indenture establishes an additional bonds test (ABT) equal to a lenient 1.25x MADS. However, capital needs are not anticipated beyond the scope of construction for the new hospital and the authority is not responsible for construction cost overruns.
ECONOMIC BASE RISK: The economic base supporting pledged revenue performance has been plagued by periods of dramatic job loss and high unemployment over the prior decade. Resident population has been stagnant and income and educational attainment measures are considerably lower than state norms.
SEPARATION OF OPERATING RISK: Based on Fitch's review of a legal opinion of external counsel Fitch believes there is a reasonable basis to conclude that the revenues pledged to repay the bonds are 'pledged special revenues' under the provisions of Chapter 9 of the bankruptcy code and would not be subordinated to the necessary operating expenses of the county, the authority, or the hospital facility financed from bond proceeds. The rating is therefore based solely on an analysis of the sufficiency of pledged revenues to cover debt service, without considering the operating risk of these entities.
DEBT SERVICE COVERAGE: Given the limited nature of the legal pledge, Fitch views the level of debt service coverage from pledged taxes as the key rating sensitivity. A variety of factors may influence coverage over time, including but not limited to the performance of the area economy and issuance of additional parity indebtedness.
Randolph County is located along the central eastern border of the state, spanning a total land area of 584 square miles with a relatively small 2014 estimated population of 22,539. The Randolph County Health Care Authority is a public hospital corporation governed by an 11-member board of directors appointed by the Randolph County Commission.
The authority is undertaking the construction of a new 15-bed general hospital with an acute care 24-hour, 7 days a week emergency department. The new hospital is expected to be placed in service in November 2017 and will be leased to Tanner Medical Center Alabama. Once placed in service the authority's Wedowee Hospital, currently the only existing hospital in the county, will be closed.
The authority is partnering with Tanner in the design and development of the hospital. Tanner has donated to the authority the land on which the new hospital will be constructed and is obligated to contribute up to $6 million to equip the new hospital. Tanner's commitment to this project is an extension of its investment in the area which also includes a new $7 million medical office building and urgent care center in Randolph County. Tanner's primary healthcare facility is located in neighboring Carrollton County, GA.
SALES TAX AUTHORIZED FOR HOSPITAL CONSTRUCTION AND OPERATION
The pledged revenue consists of a 1% general sales and use tax authorized pursuant to an act adopted by the Alabama Legislature during the 2015 regular session and a resolution adopted by Randolph County in August 2015 for the specific purpose of funding the construction, maintenance, and operation of hospital facilities in the county. Imposition of the sales tax received overwhelming support from county voters at an advisory referendum in August 2015 (86% pass rate). The sales tax will be collected in the same manner and on the same transactions as the county's 1% education sales tax (references to historical collections throughout this document are based on the education sales tax).
SATISFACTORY REVENUE CUSHION TEMPERS VOLATILITY
Fiscal 2015 pledged revenues are estimated at $1.90 million are equal to 1.43x projected MADS of $1.32 million. Sales tax collections have increased at a CAGR of 3.6% from fiscal 2003-2015. However, embedded within this period are significant years of sales tax stress including declines of 9.7% in fiscal 2008, 8.6% in fiscal 2009, and 11.3% in fiscal 2011. Sales tax collections remain unbalanced with growth of 11.2% in fiscal 2014 followed by a loss of 3.3% in fiscal 2015. The rating considers the still satisfactory level of cushion that current year pledged revenue provides against historical losses. Fitch estimates sales tax revenue can decline by 30% before MADS coverage falls below 1.0x or about 1.4x the cumulative loss from fiscal 2007 - 2011.
MODERATE LEVERAGE RISK
Fitch view leverage risk as moderate. The ABT requires a lenient 1.25x coverage of MADS (existing and proposed indebtedness) from the most recent fiscal year pledged revenue.
The authority does not have any capital needs eligible for financing from proceeds of the pledged sales tax beyond the construction of the new hospital. The authority and Tanner are each a party to a joint development agreement pursuant to which the authority has committed to pay $20 million toward the cost of the new hospital construction (to be funded from proceeds of the proposed bond offering), and Tanner has agreed to cover any cost overruns without reimbursement by the authority.
ADEQUATE LEGAL PROVISIONS
The sales tax levy is not contingent on the hospital's completion, its lease to an operator, or operation (see 'Bankruptcy Considerations' below for more information). The county and the authority have entered into a sales tax agreement within which the county has designated the authority as the recipient of the sales tax and has covenanted that it will not repeal the sales tax in whole or in part or otherwise amend the sales tax resolution in a manner that would reduce the rates at which the sales tax is levied until all obligations secured by such have been repaid.
The trustee is required to make monthly deposits to the debt service fund for the bonds until the amount therein equals the debt service due on the bonds in that respective bond year. Any surplus sales tax revenue at year end becomes available for any lawful purpose of the authority. The authority and Tanner have expressed their intention within the hospital lease agreement to apply any such surplus to the cost of operating and maintaining the hospital. No disbursement is made at year end if an event of default exists under the indenture, if there is a deficiency in the DSRF or operating reserve (an amount held in the revenue fund equal to 1/12th MADS), or if any of the required deposits under the indenture have not been made in full.
ECONOMIC RISK FACTORS
The historical sales tax volatility noted above reflects the severe impact of the recession and the limitations of a relatively remote local area economy featuring a high dependence on manufacturing and lower wage industries. Resident employment fell 19.3% from 2006 - 2009 which was equivalent to nearly 2.0x the severity of job loss experienced statewide. The county's annual unemployment rate was no less than 9.4% from 2008 - 2011 including a high of 16.4% in 2009 (the state's unemployment rate peaked at 11.4% in 2009). The county registered a third consecutive year of job growth in 2015 and unemployment has moderated, equal to 6.0% in January 2016 (not seasonally adjusted). Median household income of $36,498 is only 84% of the state average has increased 5.5% since 2010. The county's population has increased a slight 0.7% since 2000 to an estimated 22,539 in 2014.
The manufacturing sector figures prominently in the county's economy accounting for a high 13.2% of resident employment as of September 2015. Manufacturing was hit particularly hard during the recession losing 48% of its jobs from 2006-2011. Approximately 40% of the manufacturing jobs lost during this period have been regained to date. Manufacturing concerns operating within the county include Mohawk Industries (carpet backing), CandleWick Yarns (carper yarn), Wadley Holdings (furniture), ReLintLess (lint rollers), and Corelinc (industrial components). Concentration risk is evident as Mohawk and CandleWick employ close to 600 collectively or 6.8% of total resident employment.
Outside of the manufacturing sector employment opportunities exist largely within the retail, government, and health care sectors. The county and Roanoke City school systems are the second and fifth largest employers with 296 and 170 employees, respectively. Wal-Mart is another leading employer, but despite its presence Randolph County retail sales per capita register a lackluster 57% of the Alabama average. Wal-Mart (IDR 'AA' by Fitch) is likely the largest sales tax payer in the county, however, specific remittance information by entity is not publicly available.
Based on Fitch's concurrence with a legal opinion of external counsel Fitch believes there is a reasonable basis to conclude that the sales tax revenues pledged to repay the bonds are 'pledged special revenues' under the provisions of Chapter 9 and will not constitute part of a bankruptcy filing commenced by or on behalf of the authority, the county, or Tanner. According to the opinion, the pledged sales tax revenues will constitute property of the authority in a Chapter 9 filing and continue to be secured by the lien established by the pledge of such proceeds following commencement of a bankruptcy case. Furthermore, the opinion states that no portion of the pledged sales tax revenue needed to pay debt service will be subject to diversion to pay necessary operating expenses of the hospital. This provision of Chapter 9 applies only to the extent special revenues are derived from system activities.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and
Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published in the second quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, IHS Global Insight, and Lumesis.
Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form