NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Oklahoma Development Finance Authority bonds issued on behalf of Great Plains Regional Medical Center (GPRMC):
--$34,280,000 hospital revenue bonds, series 2007 at 'BB'.
The Rating Outlook is Stable.
The bonds are secured by a pledge of the revenues of the obligated group and a debt service reserve fund.
KEY RATING DRIVERS
MEDICAL STAFF GROWTH CREDIT POSITIVE: Management has successfully implemented a key component of its strategy by recruiting key physicians which has increased staff to 74, up from 58 in 2013. As a result, annualized revenue through the six months ended Dec. 31, 2014 (the interim period) has increased to $51.5 million compared to total revenues of $41.6 million in fiscal 2014.
STRONGER 2015 VOLUMES HELP STANCH LOSSES: Improved inpatient volumes in the interim period (up 17%), driven by successful physician recruitment, helped to narrow GPRMC's losses compared to the prior year period. Through Dec. 31, GPRMC reported a $878,000 loss from operations on total revenues of $25.8 million (-3.4% operating margin) compared to $2.5 million loss from operations on total revenues of $20.5 million (-12.1% operating margin) in the prior year period. Management is projecting to meet its fiscal year 2015 budget of negative 6.8% operating loss, which Fitch believes is reasonable against mid-year results.
WEAK COVERAGE METRICS: The 'BB' rating reflects GPRMC's very light debt service coverage, which was 1.36x according to its indenture calculation for fiscal 2014, just ahead of its 1.1x rate covenant requirement. The rating also reflects GPRMC's significant debt burden, as indicated by maximum annual debt service (MADS) equal to a high 7% of fiscal 2014 revenues.
STEADY BALANCE SHEET STRENGTH: GPRMC's balance sheet has remained steady and provides adequate financial cushion that helps mitigate GPRMC's volatile operational performance. At Dec. 31, 2014, unrestricted cash equaled $23 million, or 171 days cash on hand (DCOH), 7.9x cushion ratio, and 66% cash to debt. Fitch expects liquidity to remain stable.
STAFFING STABILITY IS KEY: GPRMC's small revenue base makes it more vulnerable to medical staff and volume volatility, as evidenced by historical performance. Management's ability to maintain a stable physician and nursing staff will remain key to the rating.
SENSITIVITY TO DEBT SERVICE COVERAGE: Improving coverage from current very thin levels is necessary for any upward rating movement, given GPRMC's high degree of leverage. Conversely, any deterioration in coverage metrics from current levels will trigger downward rating movement.
GPRMC is a 62-licensed-bed community hospital located in Elk City, Oklahoma, approximately 120 miles west of Oklahoma City. Total revenues were $41.6 million in fiscal 2014.
PHYSICIAN RECRUITMENT A CREDIT POSITIVE
Management has recruited key medical staff over the past year, implementing a key component of its turnaround strategy. GPRMC added three primary care physicians year to date, one of whom started in April 2015 and did not affect reported volumes. Additionally, management has changed its emergency room physician contract to six board-certified and board-eligible physicians, which Fitch believes will help to improve negative community perceptions. Additional recruitments in key specialties--cardiology, orthopedics, urology, OB/GYN, among others--have driven volume improvements and revenue growth through the six month interim period. Total physicians number 74 year-to-date, up from 58 in 2013. Fitch believes that this should reduce the level of outmigration.
Some pressure has occurred in 2015 from nursing staff attrition and openings, reportedly from Oklahoma City wage pressure, which have resulted in an increase in nursing staff vacancy rate (currently 23%, up from 11% in 2013), increasing agency expenses to over $1 million year to date. Management has hired an interim chief nursing officer and has the goal to end reliance on agency nurse staffing in the coming 30 days.
Contributing to successful physician recruitment has been the appointment of the new CEO in February 2014. The new management team has identified key strategies to improve GPRMC's operating performance, including medical staff growth and integration, bringing swing beds back into operation, improving staff productivity, and addressing the revenue cycle process. Fitch believes that stability in the leadership team will be integral to achieving and sustaining operating improvements over the longer term.
VOLUMES SUPPORT BETTER OPERATIONS
Acute volume is up 18% through Dec. 31, 2014, to 966 admissions, after declining by 27% from 2011 to 2014. Inpatient volumes represent 34% of revenues in 2014. Fitch believes medical staff stability is key to the rating given prior volatility, and GPRMC's residency partnership with the University of Oklahoma should help in future recruitment.
Volume increases have helped improved operating performance through the interim period with GPRHC reporting a negative 3.4% operating margin through Dec. 31, 2014. This is notably improved from prior year, when operating margin was negative 12.1% at the six-month interim, and solid in comparison the prior four years, when losses were between negative 8.3% and negative 10.3%. Operating losses reflect a new physical plant (nine year average age) and high depreciation expense. Operating EBITDA was notably improved over prior year as well, to 8.6%, up from 5.1%, but level with prior year end. Management is projecting to meet its fiscal year 2015 budget of negative 6.8% operating loss despite some recent volume instability, which Fitch believes is reasonable.
HIGH LEVERAGE AND THIN COVERAGE MARGIN
GPRMC is highly leveraged, with MADS representing 7% of 2014 revenue, compared to the below investment grade (BIG) median of 4%. Historically, coverage of MADS by EBITDA has been weak at 1.6x and 1.4x in fiscal 2013 and 2014, respectively. MADS coverage by operating EBITDA was 1.2x in 2014 which is weak compared to BIG median of 1.6x. Sustained growth in debt service coverage will be key to any upward rating momentum, given the center's high leverage.
ADEQUATE BALANCE SHEET
GPRMC's cash position remains a key credit consideration, providing some financial cushion against its weak operating performance. Through Dec. 31, 2014, GPRMC maintained 214.7 DCOH in comparison with BIG median of 74.8. Further, cushion ratio of 8.1X and cash to debt of 66.2% compare favorably with category medians of 5.3x and 55.7%, respectively. Finally, the center's investments are conservative, with 100% cash and fixed income.
CONSERVATIVE DEBT PROFILE
GPRMC has minimal financing risk, with a 100% fixed rate debt profile. No additional debt is planned and capital needs are expected to remain modest. GPRMC has only fixed rate debt and no derivative exposure. MADS is equal to $2.9 million and debt service declines.
GPRMC covenants to disclose annual and quarterly disclosure, which it posts regularly to the Municipal Securities Rulemaking Board's EMMA System. Disclosure has been timely and thorough, with good access to management.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014);
--'Revenue-Supported Rating Criteria' (June 16, 2014).
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria