Fitch Rates Mississippi Baptist Health System (MS) Revs 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'BBB' rating to the following revenue bonds:

--$50,000,000 Mississippi Hospital Equipment and Facilities Authority revenue refunding bonds, series 2015 A.

In addition, Fitch affirms at 'BBB' the rating on $92,210,000 of Mississippi Hospital Equipment and Facilities Authority revenue bonds, series 2007A, issued on behalf of Mississippi Baptist Health System (MBHS).

The Rating Outlook is Stable.

The proceeds of the series 2015A bonds will be used for a partial refunding of the outstanding $80 million of the series 2009 bonds, which was not rated by Fitch. The series 2015A will be issued as multimodal bonds, initially based on the SIFMA Index Rate. The first principal payment will be Aug. 15, 2029, and the bonds will have a final maturity on Aug. 15, 2036. A debt service reserve fund will not be funded.

The balance of the refunding of the series 2009 bonds will be via approximately $30.2 million series 2015B private placement with Regions Capital Advantage, Inc. (Regions), which will close within 30 days of the issuance of the 2015A series. The private placement will have an initial five year term with interest payable only and principal due at maturity. Pro forma maximum annual debt service (MADS) of $17.9 million, allowing smoothing of bullets, occurs in 2017. The refunding is estimated to generate annual savings of approximately $445,000 and will reduce the reliance on bank financing (the 2009 series was a private bank loan with Regions Bank).

SECURITY

Debt payments are secured by a pledge of gross revenues.

KEY RATING DRIVERS

IMPROVING INTERIM PROFITABILITY: Following a weaker than expected fiscal 2014, financial improvement is gradually taking hold and operating loss though the four months of fiscal 2015 ended Dec. 31, 2014 has been reduced to $1.1 million from $8.3 million for the same period last year. MBHS' operating profitability continued to suffer for the second year, with fiscal 2014 (year-end Aug. 31) ending with a $35.5 million operating loss, translating to a negative operating margin of 8.3% and operating EBITDA margin of 2.2% Factors contributing to the poor performance over the last two years included lower Medicaid reimbursement, one time expenses related to IT implementation and consulting expenses, as well as management turnover in several key positions.

INCREASED DEBT BURDEN: MBHS' debt burden remains elevated for the rating category reflecting a $25.4 million financing executed in 2014, with pro forma maximum annual debt service (MADS) equal to 4.2% of total revenues in fiscal 2014, compared to Fitch's 'BBB' category median of 3.6%. In addition, compressed profitability resulted in weak pro forma MADS coverage by earnings before interest, taxes, depreciation and amortization (EBITDA) of 1.4x in fiscal 2014, but MADS coverage improved to 3.3x through the 2015 interim period.

ADEQUATE LIQUIDITY: MBHS' liquidity metrics have deteriorated somewhat from prior years' levels reflecting high capital spending and weaker operating cash flow. Unrestricted cash and investments decreased to $209.7 at Dec. 31, 2014 from $236.7 million in 2012, but remain adequate for the rating category equating to 176.1 days cash on hand (DCOH) and 11.7x cushion ratio, compared to Fitch 'BBB' median ratios of 145 DCOH and 10.5x cushion ratio, respectively. Fitch views MBHS' liquidity position as a major mitigating factor against the weak profitability. Cash to pro forma debt, at 87.3% slightly lags the 'BBB' median of 93.6%. Fitch expects MBHS to begin further strengthening their balance sheet once the operating improvements take hold in the near to medium term.

RATING SENSITIVITIES

SUSTAIN OPERATING IMPROVEMENT: Fitch believes MBHS' operating improvement initiatives are taking hold as reflected in the interim 2015 results. However, further negative rating actions could ensue if operating performance materially deviates from projected levels for FY 2015 or if there is material decline in liquidity metrics.

CREDIT PROFILE

MBHS operates a 435 staffed-bed hospital in Jackson, MS and two critical access hospitals: Kings Daughters Hospital (KDH) in Yazoo, MS and Leake Memorial Hospital (Leake) in Carthage, MS. MBHS holds a leading 25% market share in a competitive primary service area (PSA) which is defined as the greater Jackson metropolitan area. MBHS' two largest competitors have a 23% and a 19% market share in the PSA, respectively. MBHS' total operating revenues equaled $429 million in fiscal 2014.

WEAKENED PROFITABILITY

MBHS recorded a $28.2 million operating loss in FY 2013, resulting from flat revenues and a sharp increase in expenses. Fiscal 2014 ended with a further sizeable loss of $35.5 million (negative 8.3% operating margin), unfavorable to budget, as the organization expense increase exceeded the 2.8% growth in revenues. The system expense growth reflected an across the board salary increase and several one-time expenses including approximately $6 million of consulting fees to redesign the revenue cycle and expense related to IT implementation. The situation was exacerbated by the disruption from a management transition in the last 12 months involving several senior management personnel, including the CEO, COO and CFO. All positions have been filled and the interim 2015 financial performance reflects the benefits of a number of cost reduction and revenue enhancement initiatives implemented last year, including the elimination of $15 million of discretionary expenses.

TURNAROUND IN FISCAL 2015 TAKING HOLD

The system recorded a loss of $1.1 million through the 2015 interim period, equating to a negative 0.7% operating margin and 9% operating EBITDA margin and represents a $7 million improvement over the same period last year. Management has conservatively budgeted a loss of $4.9 million for fiscal 2015, which Fitch believes is achievable, projecting a $19 million improvement in excess income compared to fiscal 2014. Fitch's methodology includes depreciation and amortization expenses related to MOB's in operating income, which differs from MBHS' reporting format where these are reported as non-operating expenses. The budget is based on flat inpatient volumes and modest outpatient volume increase, as well as a projected $22 million of additional revenues generated from the acquisition of a 10-strong premier cardiology group in Jackson renamed Baptist Heart, higher census at Leake, now that the new facility is completed, and $9 million revenue cycle annual improvement target.

EXPANSION OF FOOTPRINT

Continuing its alignment with critical access hospitals in order to create a regional network intended to expand its referral base, MBHS has completed the acquisition of Kings Daughters Hospital in Yazoo in February 2015 for $0.5 million and is in discussion for a long-term lease of Montfort Jones Memorial Hospital in Kosciusko. In December 2014 construction was completed of the replacement facility for the Leake Memorial Hospital, a critical access hospital, and the facility is experiencing increased census.

DEBT PROFILE

Following the proposed 2015 transaction, MBHS will have approximately $240 million of debt, of which 33% will be variable rate. Coverage of $17.9 million of pro forma MADS was 1.4x in fiscal 2014, below Fitch's 'BBB median of 2.6x but was a stronger 3.3x through the interim period. MADS as a percent of revenues was still slightly elevated at 4.2% in 2014 as compared to the category median of 3.6%. MBHS' debt service drops precipitously starting with 2037 to less than $3 million. The system has one fixed payor swap with a notional par of $80 million with a mark-to market of negative $24 million as of Dec. 31, 2014 and was posting collateral of $4.7 million. The proposed Regions bank private placement has a five-year term and covenants consistent with the master trust indenture.

INCREASED CAPITAL SPENDING

MBHS' capital spending has been robust in the past four audited years and reached a peak in FY 2013 at 272.1% of depreciation expense. MBHS is nearing the end of its renovation project on its main hospital campus, with three of its four patient towers having been renovated to date and only two floors of the fourth tower still to be renovated. Management states that future capital expenditures in relation to the renovation will be approximately $20 million. In addition, MBHS completed in December 2014 the construction of a replacement facility for its Leake Memorial Hospital. The project was funded via a $25.4 million New Market Tax Credit financing. Capital expenditures are projected to be elevated over the near term but are expected to drop below depreciation by FY 2016. The capital budget for the current fiscal year is $25 million.

DISCLOSURE

MBHS covenants to provide annual and quarterly disclosure. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', June 16, 2014;

--'Nonprofit Hospitals and Health Systems Rating Criteria', May 30, 2014;

--'Fitch Downgrades Mississippi Baptist Health System (MS) Revs to 'BBB'; Outlook Remains Stable', July 1, 2014.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

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=980621

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Contacts

Fitch Ratings
Primary Analyst
Eva Thein
Senior Director
+1-212-908-0674
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Dmitry Feofilaktov
Analyst
+1-212-908-0345
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Eva Thein
Senior Director
+1-212-908-0674
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Dmitry Feofilaktov
Analyst
+1-212-908-0345
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com