Fitch Affirms NCH Healthcare System Rev Bonds at 'A'; Outlook Revised to Positive

SAN FRANCISCO--()--Fitch Ratings has affirmed the 'A' rating on NCH Healthcare System's (NCH) outstanding debt listed below.

Collier County Industrial Development Authority:

--$99.4 million health care facilities revenue bonds, series 2011.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are secured by pledged assets and a mortgage pledge.

KEY RATING DRIVERS

IMPROVED OPERATING PERFORMANCE: In fiscal 2014 (Sept. 30; audited), NCH recorded $27.9 million in operating income (5.8% operating margin) which is sharply improved from the prior year loss from operations of $5.7 million (negative 1.2% operating margin) reflecting improved patient volumes, increased casemix, and effective cost containment initiatives. Further, through the three-months ended Dec. 31, 2014, NCH generated operating income of approximately $11 million on revenues of $128.3 million equating to a very strong 8.6% operating margin and 16.1% operating EBITDA margin.

STRONG MARKET SHARE: NCH maintains a dominant in patient market share position of 77% in its primary service area of Collier County which is up from 74.3% in 2013. The next closest competitor, Physicians Regional Medical Center (PRMC; part of CHS), has had a 23% market share position. Fitch views NCH dominant market share position as a primary credit strength.

SOLID LIQUIDITY POSITION: NCH has grown its unrestricted cash and investment by 17% annually since fiscal year-end 2011. Unrestricted cash and investments of $295.9 million at Dec. 31 equates to very strong 246.2 days cash on hand (DCOH), 21.7x cushion ratio, and 182.3% cash to debt. Fitch views NCH's unrestricted balance sheet growth favorably and expects this trend to continue with manageable capital needs over the medium term.

MODEST DEBT BURDEN: Maximum annual debt service (MADS) of $13.6 million represented 2.9% of total revenues in 2014, which is consistent with Fitch's 'A' category median of 3.1%. As a result, historical debt service coverage has been very solid despite lower levels of historical profitability. MADS coverage by EBITDA was solid at 5.8x in fiscal 2014 and has been above 4.0x each year between fiscal 2011-2013.

HIGH PERCENTAGE OF MEDICARE PAYORS: NCH is challenged by its high concentration of Medicare payors and is focused on managing its costs to its governmental payor mix. Medicare accounted for over 60% of NCH's gross revenues in fiscal 2014.

RATING SENSITIVITIES

SUSTAINED PROFITABILITY IMPROVEMENT: An upgrade to 'A+' is likely over the next 12-24 months provided NCH can sustain its recent profitability improvement. Management is budgeting for a 3% operating margin in fiscal 2015, which Fitch believes is attainable. Additionally, with continued cash flow growth and manageable capital plans, NCH should be able to bolster its unrestricted cash reserves, which would be viewed favorably.

CREDIT PROFILE

NCH Healthcare System includes NCH Downtown Hospital, a 391-bed tertiary hospital in Naples, Florida and NCH North Naples Hospital, a 322-bed community hospital located approximately 10 miles north of the downtown campus, in addition to other health care related entities. Total net patient revenue was $462.8 million in fiscal 2014. NCH covenants to provide annual audited information within 180 days of fiscal year end and unaudited quarterly statements within 45 days of quarter end for the first three quarters and within 90 days of fourth quarter end.

Improved Financial Profile

In fiscal 2014 (Sept. 30; audited), NCH recorded $27.9 million in operating income on total revenues of $476.9 million (5.8% operating margin) which is a sharp improvement from a loss from operations of $5.7 million on total revenues of $454.6 million (negative 1.2% operating margin). Fiscal 2014's strong results are reflective of improved patient volumes, increased casemix, and effective cost containment initiatives. NCH's 14% operating EBITDA margin generated in fiscal 2014 has been sustained with a 16.1% operating EBITDA margin generated through the three-months ended Dec. 31 and well exceeds the 'A' category median of 9.5%.

Inpatient discharges increased to 36,386 in 2014 from 35,921 in 2013 (despite observation stays jumping to 7,448 from 5,992 over the same period) as NCH experienced higher volumes in nearly every service line. Additionally, outpatient surgeries, emergency room visits, and outpatient visits have each experienced positive growth trends over the past three years as NCH's service area continues to rebound from effects felt from the national recession.

NCH's liquidity growth has been strong. Unrestricted cash and investments totaled $295.9 million at Dec. 31 which represents 64% growth since fiscal year-end 2011 (absolute total of $180.3 million), translating into 246.2 DCOH, 21.7x cushion ratio, and 182.3% cash to debt. NCH's liquidity metrics compare favorably against Fitch's 'A' category medians of 199.2 DCOH, 17x, and 131.2%, respectively.

Strong Market Position

NCH's market share has grown to a high 77%, from 74.3% in 2013, in its primary service area of Collier County (implied GOs rated 'AA+' by Fitch), which is a favorable service area due to projected population growth and above average wealth levels. NCH also maintains strong market share in certain service lines including cardiology, orthopedics, and cancer due to the tertiary level services it provides compared to its competitors. The next closest competitor is Physicians Regional (owned by CHS), which has two 100-bed hospitals in the county and captured 23% market share.

Manageable Capital Needs

Over the past two years NCH completed several large projects, which were funded by bond proceeds. This included the construction, expansion, and renovating both the downtown and North Naples campus, which analysts recently toured and view favorably. Future capital needs are manageable and total nearly $138 million over the next three years ($53.1 million in 2015 and $52.5 million in 2016). NCH's capital plan is expected to be funded from cash flow and philanthropy with no new significant debt plans, which should be manageable based on current performance. NCH has had good philanthropic support and has raised over $100 million in the last 10 years.

Conservative Debt Profile

Total outstanding debt is approximately $162.3 million (as of Dec. 31, 2014) and is 100% fixed rate, which Fitch views as conservative. NCH has approximately $69 million in fixed rate direct placement debt, of which the earliest tender date is 2018. NCH has no swaps outstanding.

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).

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=981136

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Contacts

Fitch Ratings
Primary Analyst
Michael Burger
Director
+1-415-659-5470
Fitch Ratings, Inc.
650 California Street, Fourth Floor
San Francisco, CA 94108
or
Secondary Analyst
Emily Wong
Senior Director
+1-415-732-5620
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Michael Burger
Director
+1-415-659-5470
Fitch Ratings, Inc.
650 California Street, Fourth Floor
San Francisco, CA 94108
or
Secondary Analyst
Emily Wong
Senior Director
+1-415-732-5620
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com