Fitch Affirms Mission Health System, Inc.'s (NC) Series 2012 Bonds 'AA-'; Outlook Stable
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating on the following bonds issued by or on behalf of Mission Health System, Inc. (Mission), North Carolina:
--$7,450,000 North Carolina Medical Care Commission hospital revenue bonds series 2003;
--$243,625,000 North Carolina Medical Care Commission hospital revenue bonds series 2007;
--$60,105,000 North Carolina Medical Care Commission health system revenue bonds series 2010;
--$179,850,000 Mission Health System taxable health system revenue bonds series 2012.
The Rating Outlook is Stable.
The bonds are secured by a pledge of gross revenue, a mortgage on the primary facility and a fully funded debt service reserve fund.
KEY RATING DRIVERS:
SOLID OPERATING PROFITABILITY: Mission's operating profitability remains solid with operating EBITDA averaging 11.8% since fiscal 2010 and equaling 10.5% in fiscal 2013 and 10% in the nine-month interim period ending June 30, 2014 (the interim period). The slight compression was anticipated and reflects increased bad debt and costs associated with Mission's campus consolidation project.
ELEVATED DEBT BURDEN: The debt burden remains elevated with maximum annual debt service (MADS) equal to 3.3% of operating revenue in fiscal 2013 relative to Fitch's 'AA' category median of 2.6%. MADS coverage by EBITDA of 5.7x in fiscal 2013 was strong, but was bolstered by realized investment gains and recognized gains related to two acquisitions. MADS coverage by operating EBITDA of 3.2x in fiscal 2013 was light for the 'AA-' rating category.
SOLID LIQUIDITY METRICS: Unrestricted liquidity improved since Fitch's last review, primarily due to Mission's series 2012 taxable debt issuance, and liquidity metrics are consistent with Fitch's 'AA' category medians. Liquidity metrics are expected to compress as Mission draws down bond proceeds in support of its campus consolidation project.
STRONG MARKET POSITION: Mission maintains a leading 45% market share in its 18-county total service area. Market share is much stronger at 93.5% in its primary service area (PSA); however, the PSA only accounts for approximately 50% of Mission's admissions.
SIGNIFICANT CAPITAL PROJECT: The Mission Redesign Plan includes the consolidation of Mission Hospital's two adjacent campuses (St. Joseph's and Memorial) with the goals of addressing existing capacity constraints, reducing redundant services and achieving operating efficiencies. The project, which is estimated to cost $419 million with an expected opening date in 2019, is expected to compress operating profitability and liquidity metrics in the near term. Management is contemplating issuing additional debt in 2017 to fund a portion of the project.
SUFFICIENT OPERATING CASH FLOW: Fitch expects that Mission 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 issuance of additional debt could result in downward rating pressure.
Based in Asheville, NC, Mission Health is an integrated delivery system operating a regional tertiary care hospital, five community hospitals, a long-term acute care hospital and various related entities. Mission executed affiliation agreements in fiscal 2013 to become the sole member of Transylvania Health System and Angel Medical Center. Prior to the transactions, Mission had operated both hospitals under management agreements. Total operating revenues equaled $1.2 billion in fiscal 2013. Fitch's analysis is based on the consolidated results of Mission Health. The combined obligated group accounted for 89.3% of consolidated operating revenues and 92.2% of consolidated total assets in fiscal 2013.
SOLID OPERATING PROFITABILITY
Operating profitability remains solid with operating EBITDA margin equal to 10.5% in fiscal 2013 and 10% in the interim period. Operating EBITDA margin compressed slightly from 13% in fiscal 2012 but the compression was expected and primarily due to increased costs associated with Mission's campus consolidation project. EBITDA margin equaled a strong 17.4% in fiscal 2013 but was aided by $20.2 million in realized investment gains (compared to $6.6 million in fiscal 2012) and $52.3 million in recognized non-operating gains related to the acquisitions of Transylvania Health System and Angel Medical Center in fiscal 2013. Excluding the acquisition related gains, EBITDA margin would have equaled 14.0%.
Mission's operating profitability has been significantly aided by supplemental government funding from sources including Medicare and Medicaid disproportionate share funds and North Carolina's Medicaid assessment program. The historical supplemental funding totaled approximately $91.7 million in fiscal 2013 and reflects Mission's high proportion of Medicare and Medicaid payors as a percent of its patient revenue. Medicare and Medicaid accounted for 66.4% of Mission's gross revenue in fiscal 2013. Fitch views the high exposure to supplemental government funding as a credit concern given the expected future decline in disproportionate share funding, particularly given North Carolina's decision not to expand Medicaid under the PPACA.
ELEVATED DEBT BURDEN
Despite the solid operating profitability, MADS coverage by operating EBITDA is light for the rating category due to Mission's elevated debt burden. MADS coverage by operating EBITDA equaled 3.2x in fiscal 2013 and 2.7x in the interim period, comparing unfavorably to Fitch's 'AA' category median of 4.4x. Strong non-operating income produced solid MADS coverage by EBITDA of 5.7x in fiscal 2013 and 6.0x in the interim period. Excluding the non-operating income associated with the acquisitions, MADS coverage by EBITDA would have equaled a more modest 4.4x.
SOLID LIQUIDITY METRICS
Unrestricted liquidity increased 35.2% since June 30, 2012 to $982.5 million at June 30, 2014. The increase was primarily due to the issuance of Mission's series 2012 taxable bonds, strong investment returns and cash flows from operations. Liquidity metrics are now solid for the 'AA-' rating category with 351.2 days cash on hand, 24.2x cushion ratio and 182.5% cash-to-debt. Liquidity metrics are projected to decline as Mission draws upon bond proceeds to fund its campus consolidation project with days cash on hand projected to decrease to a low of 237 days in fiscal 2018.
STRONG MARKET POSITION
Fitch views Mission's strong market position in its service area as a key credit strength which contributes to Mission's operating stability. Mission's leading market share in its PSA increased to 93.5% in fiscal 2013 from 91.3% in fiscal 2010 while its total service area market share increased to 45% from 42.8%. Total service area market share increased despite consolidation in the service area, primarily due to acquisitions of several small community hospitals by Duke LifePoint. The increased consolidation could lead to increased competition.
SIGNIFICANT CAPITAL PROJECT
Mission is currently 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 estimated project cost increased from $350 million to $419 million, reflecting an increase in the scope of the project. Fitch views the project favorably as it should reduce redundant services and improve operating efficiencies upon completion. The project is expected to be completed in 2019.
The project is expected to be funded by the series 2012 bond proceeds, and operating cash flows. Mission may issue an additional $100 million in fiscal 2017 to provide additional project funding. Fitch will assess the impact of any additional debt as plans become more certain.
Mission Health 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 and Related Research:
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 30, 2014.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria