CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned 'AA-' ratings to the following bonds expected to be issued by the North Carolina Medical Care Commission (the commission) on behalf of Mission Health System, Inc. (Mission Health):
--$56,975,000 health system revenue refunding bonds series 2016; and
--$103,245,000 health system revenue refunding bonds series 2017.
The series 2016 and 2017 bonds are expected to be issued as fixed-rate bonds. Series 2016 bond proceeds will be used to advance refund a portion of the series 2007 and series 2010 bonds and to pay costs of issuance. Series 2017 bond proceeds will be used to refund a portion of the series 2007 bonds that are not presently advance refundable and to pay costs of issuance. Mission Health will enter into a forward delivery purchase contract through which the series 2017 bonds will be priced and sold. The series 2017 bonds are expected to be delivered in July 2017. Both the series 2016 and 2017 bonds are expected to price on Aug. 18 through negotiation.
In addition, Fitch has also affirmed the 'AA-' rating on approximately $501 of bonds issued either by Mission Health or the commission on behalf of Mission Health.
The Rating Outlook is Stable.
SECURITY
The bonds are general unsecured, joint and several obligations of the obligated group. However, Mission has covenanted to cause designated members to make payments necessary to pay debt service.
KEY RATING DRIVERS
STRONG MARKET POSITION: Mission Health maintains a leading 51% market share in its 18-county total service area, with no competitor holding greater than 8% market share. However, competitive pressure may increase due to consolidation in the service area.
SIGNIFICANT CAPITAL PROJECT: Mission Health is in the process of consolidating Mission Hospital's two adjacent campuses with the goals of addressing existing capacity constraints, reducing redundant services and achieving operating efficiencies. The project is expected to compress operating profitability and liquidity metrics in the near term.
EXPECTED PROFITABILITY COMPRESSION: As expected, operating profitability has compressed due to the campus consolidation project. Operating EBITDA margin of 10.5% in fiscal 2015 and 10.0% in the nine month interim period ending June 30, 2016 (the interim period) are weaker than the system's results prior to embarking on the consolidation project, with operating EBITDA margin averaging 12.5% between fiscal years 2009 and 2012.
MODERATING DEBT BURDEN: Mission's debt burden has moderated over the years due to solid revenue growth. Pro forma maximum annual debt service (MADS) equates to a moderate 2.9% of fiscal 2015 revenues compared to 4.4% of fiscal 2011 revenues. Pro forma MADS coverage by operating EBITDA of 3.7x in fiscal 2015 and 3.8x in the interim period was strong relative to historical results, reflecting the increased revenue base, but remains light for the rating category.
SOLID LIQUIDITY METRICS: Liquidity metrics have decreased due to spending associated with the campus consolidation project; however, 255.6 days cash on hand (DCOH), 24.2x cushion ratio and 184.3% cash to debt remain solid for the rating category and are favorable compared to projected results.
RATING SENSITIVITIES
SUFFICIENT OPERATING CASH FLOW: Fitch expects that Mission Health System will maintain operating cash flow consistent with its current rating to fund its campus consolidation project and that liquidity levels will remain in line with management's forecast. A sustained weakening in cash flow or liquidity, or the unexpected issuance of additional debt could pressure the rating.
SUCCESSFUL EXECUTION OF CONSOLIDATION PROJECT: Fitch also expects that Mission Health will successfully execute its campus consolidation project and achieve expected increased efficiencies due to elimination of redundant facilities.
CREDIT PROFILE
Mission Health, based in Asheville, NC, is an integrated delivery system operating a regional tertiary care hospital, five community hospitals, a long-term acute care hospital and various related entities. Consolidated total operating revenues increased 59% since fiscal 2011 due in part to the acquisitions of Transylvania Health System, Angel Medical Center, Highland Cashiers Hospital and CarePartners to $1.49 billion in fiscal 2015. Fitch's analysis is based on the consolidated results of Mission Health. The combined obligated group accounted for 81.6% of consolidated operating revenues and 95.4% of consolidated total assets in fiscal 2015.
STRONG MARKET POSITION
Fitch views Mission Health's strong market position in its service area as a key credit strength and expects the strong market position to contribute to Mission Health's continued operating stability. The system maintained a leading 93% market share in its primary service area (PSA) in fiscal 2015 and a leading 51% market share in its total service area. The PSA accounts for approximately 49% of Mission Health's admissions and the total service area accounts for approximately 95% of admissions. The total service area has experienced consolidation, primarily due to acquisitions of several small community hospitals by Duke LifePoint. Continued consolidation could lead to increased competition.
SIGNIFICANT CAPITAL PROJECT
Mission is in the process of executing a campus consolidation project under which the system will consolidate the operations of Mission Hospital's two adjacent campuses (St. Joseph's and Memorial) to address current capacity constraints and to increase operating efficiencies. The two campuses are located across the street from one another and collectively operate as Mission Hospital. The project is estimated to cost $419 million with the majority of costs occurring in fiscal 2018 and 2019. Fitch views the project favorably as it should reduce redundant services and improve operating efficiencies upon completion. Demolition and site work is underway. Construction is expected to begin in Oct. 2016 and the project is expected to be completed in 2019.
The project is expected to be funded by the series 2012 bond proceeds, a portion of the series 2015 bond proceeds, a $60 million equity contribution, philanthropy proceeds and an $85 million bank loan. Mission Health expects to close on the bank loan in late August 2016. The bank loan will be drawn upon as needed for the campus consolidation project. Upon closing of the bank loan, funding for the campus consolidation project will be complete. Fitch had expected Mission Health to issue up to $100 million of new debt to fund the project in either fiscal 2017 or 2018 and had included in the pro forma impact of the expected issuance in its prior rating action. Mission Health opted to enter into the bank loan now to lock in low interest rates.
EXPECTED PROFITABILITY COMPRESSION
At the time of the issuance of Mission's series 2012 bonds, operating profitability was projected to compress in fiscal years 2012 through 2015 due to costs related to the system's campus consolidation project. Operating EBITDA margins had averaged 12.5% between fiscal 2009 and fiscal 2012 before declining to 10.5% and 9.4% in fiscal 2013 and 2014, respectively. However, the compression was generally in line with the original projections, although slightly below in fiscal 2014. Operating EBITDA margin equaled 10.5% in fiscal 2015 and 10.0% in the interim period. Management has set a minimum operating EBITDA margin target of 10.25% going forward and expects to achieve this level in fiscal 2016.
MODERATING DEBT BURDEN
The system's debt burden has moderated significantly due to revenue growth. Pro forma MADS as a percent of revenue decreased from a 5.2% in fiscal 2009 to a more moderate 2.9% in fiscal 2015. However, Mission's debt burden remains elevated relative to Fitch's 'AA' category median of 2.4%. Pro forma MADS is estimated to equal $42.5 million and includes the pro forma impact of the aforementioned $85 million bank loan. Despite the compressed operating cash flows, MADS coverage by operating EBITDA increased from historical levels to 3.7x in fiscal 2015 and 3.8x in the interim period due to revenue growth, but remains light relative to Fitch's 'AA' median of 4.4x. Similarly, MADS coverage by EBITDA of 4.4x in fiscal 2015 and 4.3x in the interim period is light relative to Fitch's 'AA' category median of 5.7x.
SOLID LIQUIDITY METRICS
Similar to operating profitability, unrestricted liquidity was projected to decrease during the campus consolidation project, with cash to debt and DCOH decreasing to 128.5% and 210.4 days in fiscal 2015 in the original projections. However, liquidity metrics at June 30, 2016 are favorable to the original projections with 255.6 DCOH, 24.2x cushion ratio and 184.3% cash to debt. Liquidity metrics are currently projected to continue to decline as Mission funds its campus consolidation project with DCOH projected to decrease to a low of 178.2 days in fiscal 2019 before beginning to rebound.
DEBT PROFILE
Mission Health had approximately $558 million of total debt outstanding at June 30, 2016. The series 2016 and 2017 bond transactions are refundings and will not materially affect total debt levels. The debt portfolio includes 92% underlying fixed rate bonds and 8% underlying variable rate bonds. Fitch views the system's debt profile as conservative. Mission is counterparty to a fixed payor swap converting approximately 1% of the bond portfolio to a synthetic fixed rate. There are no collateral funding requirements so long as the system's bond rating does not fall below 'A+.'
DISCLOSURE
Mission Health System, Inc. covenants to provide annual disclosure no later than 120 days after the end of each fiscal year and quarterly disclosure within 45 days following the end of each fiscal quarter. Disclosure will be provided through 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=1010186
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010186
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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