NEW YORK--()--Fitch Ratings has affirmed the 'BBB+' rating on Holy Spirit Health System's (HSHS) outstanding debt issued by the West Shore Area Authority as follows:
--$57.5 million series 2011A;
--$33.6 million series 2011B.
The Rating Outlook is Stable.
The bonds are secured by a pledge of gross receipts, a security interest in present and future accounts receivable, contract rights, general intangibles, and an open-end mortgage (on hospital property).
KEY RATING DRIVERS
MANAGEABLE DEBT BURDEN: Using maximum annual debt service (MADS) of $9.6 million, HSHS had debt service coverage by EBITDA and operating EBITDA of 3.1x and 2.4x, respectively in 2012 (June 30; unaudited). Over the past four fiscal years MADS coverage by operating EBITDA has averaged 2.7x, which is slightly better than Fitch's 2.5x median. Further, MADS as a percentage of revenue was low at 2.5% in 2012, which compared favorably against Fitch's 3.3% median.
SOLID VOLUME GROWTH: Due to a physician alignment strategy that Fitch views favorably, HSHS has grown its employed physician base, which has supported good volume growth. Specifically, inpatient admissions improved to 15,448 in 2012 from 14,846 in 2011, while outpatient surgeries, emergency department visits, and overall outpatient cases increased as well.
PROFITABILITY DECLINE: In fiscal 2012 (unaudited), HSHS recorded $981,000 in income (0.3% operating margin), which was a decrease from the prior year's $3.6 million profit (1.1% operating margin). The primary drivers behind the profitability drop are larger than expected losses from the organization's physician group, pre-hospital care organization, and increased uncompensated care and agency labor expenses.
COMPETITIVE MARKET PLACE: HSHS maintains a second-place market position in the primary service area (PSA) with a 27.1% market share, which showed improvement over 26% market share in 2011. HSHS's market share growth is primarily attributable to the organization's physician alignment investment. However, HSHS's main competitor, Pinnacle Health System (PHS), is constructing a new acute care facility within HSHS's PSA, which is scheduled to open in 2014. In addition to the profitability decline, Fitch views the increased competition within the service area to be a credit concern.
STABLE LIQUIDITY POSITION: At June 30, 2012, HSHS had $103.5 million in unrestricted cash and investments, which translated into 120.2 days cash on hand (DCOH), 10.7x cushion ratio, and 100.7% cash to debt. The organization's balance sheet metrics are stable compared against fiscal 2011's levels and consistent with Fitch's 'BBB' category medians of 138.9 DCOH, 9.4x, and 82.7%.
MANAGEABLE CAPITAL NEEDS: Management's three-year capital plan calls for total expenditures of nearly $120 million, which will be funded from prior bond proceeds ($18.3 million remaining) and operating cash flow. Fitch views HSHS's capital plans to be manageable, which is intended to fund various facility renovations, information technology needs, and the organization's outpatient facility expansion plan.
RATING AFFIRMATION OF 'BBB+'
The rating affirmation of 'BBB+' reflects HSHS's manageable debt burden and adequate debt service coverage, stable liquidity position, manageable capital needs over the medium term, and good utilization growth.
Fitch continues to view the system's adequate debt service coverage and moderate debt burden as primary credit strengths as HSHS had 3.1x MADS coverage in 2012, which compared favorably against Fitch's median of 2.8x. Additionally, management states there are no plans for significant additional debt that would negatively impact the organization's leverage metrics over the medium term.
Fitch views the organization's strategic plan of building its physician base favorably, which is beginning to display signs of success as evidenced by good volume and market share growth. Despite continuing losses from the organization's physician group operations, HSHS was able to maintain a satisfactory profitability base to support debt service coverage consistent with historical trends.
In Fitch's last review (October 2011), HSHS was expected to reach a 1.8% operating margin in fiscal 2012. However, largely due to increased expenses associated with the organization's physician alignment strategy which included employing additional physicians, operating income dropped to a low 0.3% operating margin. In fiscal 2012, losses from HSHS's physician group totaled $11.5 million, which was an increase from 2011's $3 million. Additionally, management estimates losses from the physician group to be approximately $13 million-$15 million in fiscal 2013, which will continue to hamper operating income. Although Fitch views the organization's physician alignment strategy favorably, Fitch does believe the organization must maintain its current level of operational profitability to sustain the 'BBB+' rating. Fitch believes HSHS's physician investments will be accretive to the organization over the long term.
Fitch views favorably HSHS's improving market position as an additional credit strength. However, Fitch is concerned by the potential impact of PHS's planned new inpatient facility located within HSHS's PSA. Management believes the new facility will dilute some inpatient volumes, but will not have a severe impact on HSHS's operations.
The Stable Outlook reflects Fitch's expectation that HSHS will maintain profitability consistent with recent historical levels despite budgeting for increased losses from its physician group. Fitch views favorably HSHS's ability to consistently grow market share, build the system's liquidity position, and implement a good physician alignment strategy, which supports a financial profile consistent with the 'BBB+' rating notch.
However, negative rating pressure may be warranted if HSHS's profitability position deteriorates further from its current level.
CONSERVATIVE DEBT PROFILE
Fitch views the system's debt portfolio positively, which is conservative at 100% fixed rate. The aggregate MADS used in Fitch's analysis incorporates all outstanding debt including capital leases and mortgages and note payables. HSHS's debt service is declining with MADS occurring in 2013 and dropping to approximately $3 million in 2033.
Holy Spirit Health System operates a 315 licensed-bed acute care hospital located in Camp Hill, PA, in Cumberland County. In fiscal 2012, HSHS had approximately $358 million in total operating revenue. HSHS has covenanted to provide annual audits within 180 days of fiscal year end and quarterly disclosure within 60 days of quarter end to the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', July 23, 2012.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria