SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the $45,140,000 Industrial Development Authority of the County of Yavapai (AZ) hospital revenue refunding bonds series 2016 issued on behalf of Yavapai Regional Medical Center (YRMC). In addition, Fitch has affirmed the 'BBB+' rating on YRMC's outstanding debt, which is listed at the end of the press release.
The Rating Outlook is Positive.
The series 2016 bonds will be fixed rate and bond proceeds will refund YRMC's outstanding series 1997B, 2002, and 2008B bonds. The plan of finance assumes the release of the existing debt service reserve funds. The series 2016 bonds are expected to price the week of Oct. 17th.
SECURITY
Debt payments are secured by a pledge of the gross revenues of YRMC and a mortgage on YRMC's east campus.
KEY RATING DRIVERS
SUSTAINED TREND OF IMPROVED PERFORMANCE: Fitch revised the Outlook to Positive during the last rating review in June 2016 due to YRMC's continued trend in improved financial performance and decline in leverage. After YRMC posted its first operating loss in over 15 years in the fiscal year ended Dec. 31, 2013, profitability recovered in 2014 (2.3% operating margin) as expected and improved in 2015 (5.2% operating margin). Performance through the six months ended June 30, 2016 is at a much higher level (13.7% operating margin) as a result of the expansion of services and solid revenue growth.
DOMINANT MARKET POSITION: YRMC's market share has consistently been above 70% in its service area, which has good population growth trends especially in the over 65 age cohort. The strong market share reflects the absence of direct competitors in YRMC's vicinity, as the nearest acute care facility is over 40 miles away. However, Fitch believes its relatively small revenue size exposes the organization to volatility in performance, which has been evident in the past.
SOLID LIQUIDITY: At June 30, 2016, key liquidity metrics compare favorably to Fitch's BBB category medians with 220.6 days cash on hand and 155.3% cash to debt compared to the 'BBB' medians of 161.2 and 90.8%. Given manageable capital plans going forward, current liquidity levels are expected to be sustained. Fitch believes YRMC's solid liquidity position helps mitigate potential operating volatility.
SOUND DEBT METRICS: Leverage metrics have improved especially with the growth in YRMC's revenue base. In addition, the current aggregate debt service schedule was frontloaded. MADS dropped to $8.8 million in 2016 from $9.8 million the prior year. With the refinancing, MADS is expected to decline to $8 million. Based on proforma MADS, coverage was solid at 4.6x in 2015 compared to 3.4x in 2014 and 1.8x in 2013. Due to the significant improvement in profitability through the six months ended June 30, 2016, MADS coverage improved to 8.1x.
RATING SENSITIVITIES
LONGER TREND OF IMPROVED PERFORMANCE: The Positive Outlook reflects Fitch's expectation that upward rating movement is likely over the next year if the improved financial performance is sustained. In light of Yavapai Regional Medical Center's smaller revenue base and high governmental payor mix (73% of gross revenue from Medicare and Medicaid in 2015), further sustainment of improved operating performance is necessary for upward rating movement.
Credit Profile
Yavapai Regional Medical Center is a two-hospital system operating on two campuses - West Medical Center (in the city of Prescott, 100 miles northwest of Phoenix) and East Medical Center (in Prescott Valley, 85 miles northwest of Phoenix). YRMC operates a total of 206 licensed (186 staffed) beds. In 2015, YRMC reported $278.3 million in total operating revenue.
Sustained Trend of Improved Performance
Performance in 2013 was affected by several one-time items including a breakdown in revenue-cycle process following an IT conversion, sequestration (YRMC's Medicare exposure nears 60%), and lower than budgeted volume. As expected, performance rebounded in 2014, further improved in 2015 and was very strong through the six months ended June 30, 2016. Strong profitability has mainly been driven by new and enhanced services, improvement in revenue cycle, and focus on productivity.
Performance through the six months ended June 30, 2016 is very strong and much higher than the same prior year period and in excess of budget. Management expects to end 2016 with a bottom line of $21.6 million compared to $17 million in fiscal 2015 (6.1% excess margin) despite an additional $6 million expense related to an expected settlement. YRMC recorded this additional expense in Sept. 2016 related to an expected settlement with the DOJ regarding a qui tam lawsuit related to errors in YRMC's wage data that led to overpayments by Medicare for the cost reports from 2006 - 2009.
Management expects operating performance to be sustained at the 2016 level and will be aided by expected supplemental reimbursement from sole community hospital status beginning in 2017 (net $5 million in revenue).
Dominant Market Position
Fitch believes YRMC's operations continue to benefit from its position as the sole acute care provider in its primary service area, with the nearest competitor located 40 miles away. Inpatient market share was 74% in 2015 and 2014. Volume growth has been solid especially in outpatient surgeries. The service area is experiencing population growth, and given its distance to tertiary facilities, higher acuity services are offered at YRMC and recent new expanded services include a hybrid operating room, electrophysiology, and transcatheter aortic valve replacement.
YRMC has applied for sole community hospital provider status, since it meets the criteria. One of the requirements is a single Medicare provider number and YRMC is in the process of consolidating its Medicare provider numbers for the West and East campus.
YRMC is part of Arizona Care Together - a regional alliance of six comparable community hospitals in Arizona to share best practices and coordinate resources in order to be able to manage population health. YRMC is also currently participating in a Medicare-accountable care organization that has over 28,000 attributable lives.
Solid Liquidity
At June 30, 2016, unrestricted cash and investments totaled $155.8 million, equating to 220.6 days cash on hand, 19.4x cushion ratio, and 155.3% cash to debt, comfortably exceeding respective medians of 161.2 days, 11.7x, and 90.8%. Liquidity ratios are expected to increase as capital needs are manageable and should result in excess cash flow. Capital needs total $20.3 million in 2016, $18.8 million in 2017, and $27.7 million in 2018 compared to EBITDA of $36.8 million in 2015. Major projects include a new medical office building and parking, expansion of cath lab and radiology at the west campus, and ambulatory surgery expansion at the east campus.
Debt Profile
Total long-term debt was $103.3 million at Dec. 31, 2015 and the only variable-rate exposure is a direct bank placement with BMO Harris for its series 2013B bonds, which are at an indexed floating rate with an initial term of 10 years and expires in 2023. The total par amount of the direct bank loan is $20.4 million and the direct bank loan documents include additional covenants than what is in the master trust indenture. Also, the bank documents include non-financial related covenants (i.e. failure to meet reporting requirements) as an event of default, which Fitch views negatively. However, Fitch views the potential acceleration of debt from a financial reporting covenant violation as a remote situation.
Debt metrics have improved as a short-term loan for its EMR matures in 2016. MADS for 2016 is $8.8 million compared to $9.8 million the year before. With the refinancing, MADS is now projected to be $8 million which occurs in 2019 and debt service steadily declines thereafter. There are no additional debt plans.
Disclosure
YRMC covenants to provide annual disclosure within 150 days of fiscal year end, and quarterly disclosure within 60 days of quarter end through the Municipal Securities Rulemaking Board's EMMA system.
Outstanding debt:
-- $30,265,000 Yavapai County Industrial Development Authority (AZ) (Yavapai Regional Medical Center) hospital revenue refunding bonds series 2013A;
-- $30,000,000 Yavapai County Industrial Development Authority (AZ) (Yavapai Regional Medical Center) revenue bonds series 2008B.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun
2015)
https://www.fitchratings.com/site/re/866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012956
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012956
Endorsement Policy
https://www.fitchratings.com/regulatory
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