NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued by the Flint Hospital Building Authority on behalf of Hurley Medical Center (Hurley):
--$32.72 million revenue rental bonds series 2010;
--$21.94 million revenue rental bonds series 2013A;
--$34.80 million revenue refunding bonds series 2013B.
The Rating Outlook is Stable.
SECURITY
Debt payments are secured by cash rentals (net revenues of Hurley) made to the Flint Hospital Building Authority, acting through its Board of Hospital Managers, on behalf of Hurley as agreed under the eighth amended and restated contract of lease dated Feb. 1, 2013. Also, there is a fully funded debt service reserve fund.
KEY RATING DRIVERS
IMPROVED OPERATING PERFORMANCE: Fitch upgraded Hurley from 'BB+' during its last rating review, reflecting dramatically improved operating performance. Hurley's operating margins jumped to 6.1% and 9.0%, respectively, in fiscal 2015 and 2016 (yea ended June 30) from 0.6% in fiscal 2014 and negative 1.7% in fiscal 2013. Margin improvement is being driven by a continued focus on expense management, growing volumes, and dramatically reduced bad-debt expenses as a result of more patients acquiring health insurance from the state of Michigan's Medicaid expansion.
SHARP IMPROVEMENT IN LIQUIDITY: Hurley's liquidity position and metrics have improved sharply over the last few years with unrestricted cash and investments jumping to $166.14 million at June 30, 2016 from $67.82 million at the end of fiscal 2014. Cash growth has been driven by a combination of improved profitability, favorable governmental payment adjustments, reduced capital spending, and revenue cycle improvement.
CHALLENGING PAYOR MIX: Fitch's key credit concern reflects Hurley's competitive service area and poor socioeconomic indicators which are reflected by a weak payor mix. In fiscal 2016, Medicaid made up a very high 45.3% of gross revenues. However, the expansion of Michigan's Medicaid program provided material financial benefit, which has been a key driver in Hurley's operating improvement.
MANAGEABLE DEBT PROFILE: Hurley's debt profile is very manageable with all fixed-rate debt and maximum annual debt service (MADS) at 2.4% of fiscal 2016 revenue. Additionally, Hurley's MADS declines by about $5 million, or over 40%, in 2021, providing cash flow flexibility and potential debt capacity. MADS coverage by EBITDA was very good for the rating category at 6.2x in fiscal 2016, improved from 1.3x in fiscal 2013.
SIZEABLE PENSION OBLIGATION: Due to the implementation of GASB 68, the medical center was required to record a sizable net pension liability on its balance sheet at fiscal year-end (FYE) 2015 (that amounts to $195.36 million as of Sept. 30, 2016). While Hurley's liability profile does not change with the pension accounting, Fitch notes the dramatic reduction in net assets and the negative impact on certain capital-related ratios.
RATING SENSITIVITIES
SUSTAINED FINANCIAL PERFORMANCE AND POSITION: Fitch expects Hurley to maintain a higher level of operating profitability compared to historical performance. The sharp improvement in liquidity provides sufficient financial cushion to offset Hurley's elevated exposure to changes in reimbursement from governmental payors. While not anticipated, a significant reduction in supplemental payments that would cause margins to return to negative levels could pressure the rating.
CREDIT PROFILE
Hurley is a 443-bed acute care teaching hospital with safety-net provider status located in Flint, Michigan. Hurley had $467.96 million of total revenue in fiscal 2016. A safety-net teaching hospital, Hurley is the only provider in the region of Level I Trauma, Level II Pediatric Trauma and Level III Neonatal Intensive Care, among other services. The medical center has an active outreach effort with many local organizations and is focusing on improving community health.
FINANCIAL PROFILE IMPROVEMENTS
Hurley's liquidity position improved sharply over the past few years with several key liquidity metrics that now meet or exceed Fitch's 'BBB' category medians. At June 30, 2016, Hurley had $166.14 million in unrestricted cash and investments, equal to 148.8 days cash on hand, 14.7x cushion ratio and 180.1% of total debt which are significantly improved from 61.1 days, 5.3x and 55.7%, respectively, at FYE 2013. Liquidity improvement has been driven by higher earnings, positive governmental payment adjustments and moderating capital spending. In addition, improvements in revenue cycle noticeably reduced accounts receivable balances, with days in accounts receivable declining to 41.1 in fiscal 2016, down from 58.1 in fiscal 2013.
No plans for additional debt coupled with higher margins and modest capital spending should lead to further strengthening of the liquidity position over the near term.
Operating performance improved dramatically during the past two audited years; Hurley posted a 6.1% operating margin ($25.4 million) in fiscal 2015 and 9.0% operating margin ($42.2 million) in fiscal 2016. Through the three-month interim period ending Sept. 30, 2016, the operating margin remains very good at 5% ($6 million). The medical center's operating EBITDA margins were 11.6% and 14.0%, respectively, in fiscal 2015 and fiscal 2016, both in excess of Fitch's 'BBB' category median of 8.7%. The improved operating performance reflects increased supplemental payments, growing volumes, management initiatives to move care to lower-cost, more convenient settings, and tightly managed expenses.
DEBT PROFILE
Hurley has approximately $92.2 million in debt outstanding, which is all fixed-rate. The debt burden is very manageable with MADS equaling 2.4% of fiscal 2016 revenue. MADS of approximately $11.3 million is front-loaded and decreases to about $6.2 million in 2021. MADS coverage by EBITDA was 4.4x in fiscal 2015 and 6.2x in fiscal 2016, up from 2.3x in fiscal 2014 and well above Fitch's 'BBB' category median of 3.0x.
In fiscal 2015, Hurley implemented GASB Statement No. 68, Accounting and Financial Reporting for Pensions. As a result, the medical center was required to record a large net pension liability on its balance sheet. While Hurley's liability profile does not change with the pension accounting, Fitch notes the dramatic reduction in net assets and weakened capital-related ratios. The medical center's net pension liability at June 30, 2016 was $195.36 million, amounting to a 66% funded status assuming a relatively high 8% discount rate. While Hurley's adjustments to its defined benefit plans a few years ago provided budgetary certainty and more stabilized funding status, operating pressure from increased pension contributions are a risk to its improved financial performance.
On a positive note, Hurley made advance contributions to fund its other postemployment benefit (OPEB) obligations during the past few years and also maintains a fiduciary fund with approximately $53 million of cash and investments to support operations and moderate its long-term OPEB liability.
A few years ago, Hurley invested heavily in its plant, with capital expenditures averaging a high 181% of depreciation expense from 2012-2014. Capital spending is now more moderate and was only 76.6% of depreciation in fiscal 2015 and 96.5% in fiscal 2016. Hurley's last significant capital project was the expansion of its emergency department to serve the high volumes that could not be accommodated in its former space. This project was successful and the expansion and redesign have allowed for better patient flow, operating efficiencies and improved patient care.
CHALLENGING ECONOMIC ENVIRONMENT AND PAYOR MIX
Located in Flint, Michigan, Hurley operates in an economically depressed service area with a very challenging payor mix. The payor mix is heavily weighted toward governmental payors with 45.3% of gross revenues derived from Medicaid and 29.8% from Medicare in fiscal 2016. Michigan's Medicaid expansion greatly benefited the medical center as indicated by bad debt expenses dropping to $16.6 million in fiscal 2016, from $51.2 million three years earlier. In fiscal 2016, Hurley received about $81.2 million of net supplemental Medicaid payments, which is approximately a $26.1 million increase from fiscal 2015 and included about $9 million in retroactive monies from prior years. Hurley's significant reliance on supplemental governmental payments remains a credit risk. However, there is some level of certainty as to supplemental funding over the next several years given that the state of Michigan obtained its Medicaid waiver extension.
DISCLOSURE
Hurley covenants to provide annual and quarterly disclosure 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/site/re/750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/site/re/866807
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