NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'BBB+' rating on the following Health, Education and Housing Facilities Board of the County of Sullivan, Tennessee bonds issued on behalf of Wellmont Health System (Wellmont):
--$76,165,000, hospital revenue refunding bonds (Wellmont Health System
Project), series 2011;
--$200,000,000 hospital revenue bonds, series 2006C (Wellmont Health System Project);
--$54,820,000 hospital revenue refunding bonds, series 2005 (Wellmont Health System Project);
--$25,225,000 hospital revenue refunding bonds, series 2003 (Wellmont Health System Project).
In addition, Fitch affirms at 'BBB+' the following parity debt also issued on behalf of Wellmont:
--$55,000,000 Virginia Small Business Financing Authority hospital revenue bonds, series 2007A (Wellmont Health System Project).
The Rating Outlook is Stable.
KEY RATING DRIVERS:
STRONG OPERATING EBITDA: Wellmont's operating EBITDA is consistently above Fitch's 'BBB' category median, averaging 11.5% over the past four audited years and at 9.9% in the six-month fiscal 2014 (June 30 year-end) interim period.
LIQUIDITY A CREDIT STRENGTH: Wellmont has $419.6 million in unrestricted cash and investments (not including $27 million in illiquid funds) at Dec. 31, 2013, a 6% year-over-year increase. Wellmont's key liquidity figures compare favorably to Fitch's 'BBB' medians.
ADEQUATE DEBT SERVICE: Most of Wellmont's financial and capital metrics are consistent with the rating category.
LEADING MARKET SHARE: Wellmont maintains a leading 56% inpatient market share in its defined primary service area (PSA). Although market share has declined slightly in the past few years, Fitch is not concerned, as Wellmont remains competitive in key strategic service lines.
ELEVATED DEBT BURDEN: Maximum annual debt service (MADS) as a percentage of revenue was high at 5.4% in the six-month interim period relative to a Fitch's 'BBB' median of 3.5%. However, after completing a large EPIC implementation at a cost of approximately $100 million, for which it assumed additional debt, Wellmont's capital spending should slow, which should allow it to moderate its debt burden.
SEEKING STRATEGIC PARTNER: Wellmont is in the process of evaluating potential strategic partnerships. The process of evaluating and choosing a potential partner is expected to be completed in the next 12 months. The effect of a strategic partnership on Wellmont is not factored into the rating. Fitch will continue to monitor the process and will evaluate a partnership once the process is completed. For the remaining fiscal year, Fitch expects Wellmont's performance to improve slightly as the expenses related to EPIC implementation have been fully absorbed.
Wellmont Health System (WHS) is a large regional health care system with seven acute hospitals (816 staffed beds) and other related entities located in northeastern TN and
southwestern VA. Wellmont had approximately $798.2 million in total revenue in fiscal 2013.
The 'BBB+' rating is supported by an overall financial profile consistent with Fitch's 'BBB' rating category medians and Wellmont's leading inpatient market share in its defined PSA. Wellmont finished fiscal 2013 with a 1.6% operating margin and MADS coverage of 2.6x, both adequate for the 'BBB' category, but below category medians. Wellmont's operating EBITDA was stronger at 10.8%, above the category median of 9%.
Operations were lower in the first six months of fiscal 2014 due largely
to EPIC implementation costs, as Wellmont went live with its physicians
in December 2013 and
live in its hospitals in late March 2014. For fiscal 2014, Wellmont budgeted for $13.5 million of implementation expenses that cannot be capitalized, with a portion of those expenses coming in the first half of the fiscal year. However, Wellmont did anticipate these expenses and is tracking ahead of budget for the first six months. In the first six months of fiscal 2014, Wellmont posted a 1.2% operating margin and 2.2x debt service coverage, compared to a 1.6% operating margin and 2.5x debt service coverage for the first six months of fiscal 2013. Wellmont's management reports that performance continues to be ahead of budget through February 2014, and Fitch expects Wellmont's operating performance to continue to improve through the end of the fiscal year.
Liquidity has continued to strengthen with unrestricted cash growing 6% in the year-over-year interim period and 49% from fiscal year-end 2010. At Dec. 31, 2013, Wellmont had cash and unrestricted investments of $419.6 million (excluding $27 million in illiquid investments), which equated to days cash on hand of 213.3, a cushion ratio of 10x, and cash-to-debt of 82.6%, which compare well to 'BBB' category medians of 144.7, 10.2, and 91.7, respectively.
Wellmont's debt burden remains elevated for the rating level, as represented by MADS as a percentage of revenue of 5.4% and debt-to-EBITDA of 5.5x. as of Dec. 31, 2013, both of which compare unfavorably to 'BBB' category medians. However, Fitch expects debt to moderate with the EPIC implementation completed. Wellmont is issuing bank debt to acquire a skilled nursing facility, Wexford House, but the facility is producing enough cash flow to cover the additional debt.
Fitch views the acquisition as credit neutral. The skilled nursing facility will build on Wellmont's efforts to prepare for population health management and other aspects of health care reform. Other initiatives in this effort include participating in an Accountable Care Organization, structuring shared savings contracts with select payors, and continuing to position the organization as the low-cost, high-quality provider for the region.
Potential Strategic Partnerships
Wellmont is actively exploring a strategic partnership through a formal RFP process.
Wellmont plans to evaluate the RFP responses, and Fitch expects a decision to be made within the next rating cycle. The financial arrangement of a potential partnership is not clear and could range from a loose affiliation to a full asset merger. Fitch views the potential partnership as credit neutral as much will depend on the outcome of the process and the final partner. However, Fitch notes positively that Wellmont is entering the process from a position of credit strength with a strong balance sheet, good market position, and consistent levels of operations and debt service coverage.
Wellmont's debt portfolio is relatively conservative with approximately 15% of its $508 million of long-term debt in variable-rate mode. However, Wellmont does have four swaps. Two are fixed payor swaps, one is a basis swap, and one is a total return swap.
There are no collateral posting requirements at the current rating level. The aggregate mark to market as of Dec. 31, 2013 was a negative $7.2 million.
In addition, Wellmont is planning to restructure some of its debt in the next three months. Fitch expects that the covenants for that debt will remain consistent with the current covenants.
WHS covenants to provide audited financial statements to the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system (EMMA), as well as quarterly unaudited statements.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--Rating Guidelines for Nonprofit Hospitals and Health Systems, May 20, 2013
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Rating Guidelines for Nonprofit Continuing Care Retirement Communities