Fitch Affirms Trinity Mother Frances Health System (TX) Revs at 'BBB+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'BBB+' rating on the Tyler Health Facilities Development Corporation revenue bonds (Mother Frances Hospital Regional Health Care Project) issued on behalf of Trinity Mother Frances Health System, TX (TMFHS) as follows:

--$51.7 million revenue bonds series 2011;

--$64.7 million hospital revenue bonds series 2007A;

--$23 million hospital revenue bonds series 2007B.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a revenue pledge, a mortgage on the main hospital campus in Tyler, and a debt service reserve fund.

KEY RATING DRIVERS

OPERATING IMPROVEMENT: As expected, TMFHS produced healthier operating performance in fiscal 2014 (unaudited, June 30 year-end), driven by the successful ramp up of its new heart hospital, focused work on operating efficiency and expense control, as well as benefiting from an increase in supplemental funding. TMFS' operating margin improved to 6.9% in fiscal 2014, from 0.4% in fiscal 2013.

BETTER LIQUIDITY: As of June 30, 2014, TMFHS held $247.9 million of unrestricted cash and investments amounting to 143.1 days cash on hand (DCOH) and a 12.5x times (x) cushion ratio against Fitch's 'BBB' medians of 145 DCOH and a 10.2x cushion ratio. As expected, this reflects modest improvement over prior year.

MANAGEABLE CAPITAL NEEDS: With the opening of its new heart hospital in December 2012 (fiscal 2013), TMFS' capital needs should remain moderate near $35 million annually going forward, which is just over 100% of depreciation expense.

MODERATE DEBT BURDEN: TMFHS' total debt burden remains manageable for the rating level. MADS as a percent of revenue and debt to capitalization were 2.9% and 38.2% in fiscal 2014, both favorable to Fitch's 'BBB' category medians of 3.6% and 44.9% respectively. No additional debt is planned.

INTEGRATED MEDICAL STAFF: TMFHS continues to grow and align its physician base via the Trinity Clinic, which now houses over 330 employed physicians and mid-levels out of a total 595 active medical staff members. TMFHS has benefitted via solid clinical volume in 2014 as part of a targeted growth strategy, and via steady leading market share within Smith County.

RATING SENSITIVITIES

STEADY PROFITABILITY: Fitch anticipates TMFHS' to sustain solid operating cash flow and coverage above the 'BBB' category median over the near to intermediate term, which should allow for balance sheet growth due to moderate capital needs.

CREDIT PROFILE

TMFHS is located in Tyler, TX and operates a total 469 beds (524 licensed) at its flagship Mother Frances Hospital, the Louis & Peaches Owen Heart Hospital, and critical access hospitals in Jacksonville and Winnsboro. Additional entities include the Trinity Clinic (a multispecialty physician group), a foundation, a regional reference laboratory, and ownership interests in two specialty hospitals. Total system revenues were $711.8 million in unaudited fiscal year 2014 (June 30 year-end).

Fitch's analysis is based on the consolidated TMFHS system. The obligated group includes the Mother Frances Hospital and other related facilities in Tyler, which produced $536.7 million in total revenues in unaudited fiscal 2014 (75% of the system total).

IMPROVED OPERATIONS

Following weaker results in fiscal 2013 as it opened its new heart hospital as well as implemented a new electronic health record, TMFHS rebounded as expected with solid fiscal 2014 profitability. Through unaudited fiscal year ended June 30, TMFHS generated a 13.1% EBITDA margin, producing 4.7x coverage of maximum annual debt service (MADS). Fitch notes TMFHS produced 4.92x MADS coverage per its fiscal 2014 covenant calculation, which is based on obligated group performance.

Operating cash flow was improved via clinical volume growth, especially around cardiology services following the heart hospital opening. In addition, TMFHS effectively managed expenses including benefits restructuring, a targeted workforce reduction, and better productivity and efficiency. Fitch notes that TMFHS receives a significant amount of supplemental funds which help support operations, totaling over $48 million in fiscal 2014 including disproportionate share hospital (DSH) and Texas Medicaid 1115 Waiver funds. The total amount of these funds increased by $20 million from 2013 to 2014. TMFHS is budgeting for steady operating results in fiscal 2015, which Fitch believes is reasonable.

STRENGTHENED BALANCE SHEET

TMFHS' liquidity improved, in part due to better revenue cycle management bringing days in accounts receivable down to 39.4, back in line with historical levels, from a high above 50 days during fiscal 2013. In addition, curtailed discretionary capital spending allowed for solid cash flow to bolster liquidity.

TMFHS expects to maintain moderate capital spending as its operating cash flow allows. As a result, its balance sheet metrics should at least remain stable and demonstrate incremental growth in unrestricted liquidity.

CAPITAL STRUCTURE

TMFS' debt burden is manageable, and no additional debt is expected over the near term. As of June 30, 2014 TMFHS had a total $207.4 million in long term debt, of which approximately $16 million was variable rate direct placement debt through maturity in 2022. TMFHS has an additional $40 million in direct placement debt through maturity in 2020. MADS equals $19.8 million on a consolidated basis. TMFHS also retains a $37.5 million notional basis swap, which had a mark to market of -$1.2 million at June 30, 2014. The collateral threshold is $5 million, and no collateral is currently posted.

DISCLOSURE

TMFHS covenants to provide quarterly and annual utilization and financial information to the Municipal Securities Rulemaking Board's EMMA system. Disclosure to Fitch has been routine and

very timely, with very good access to management.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014).

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=870274

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Emily E. Wadhwani, +1-312-368-3347
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago IL 60602
or
Secondary Analyst
Michael Burger, +1-415-659-5470
Director
or
Committee Chairperson
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Emily E. Wadhwani, +1-312-368-3347
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago IL 60602
or
Secondary Analyst
Michael Burger, +1-415-659-5470
Director
or
Committee Chairperson
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com