Fitch Affirms Lafayette General Medical Center's (Louisiana) Rev Bonds at 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the 'A-' rating on the following bonds issued on behalf of Lafayette General Medical Center, Inc., LA (LGMC):

--$84,840,000 Louisiana Public Facilities Authority hospital revenue bonds, series 2010.

The Rating Outlook is Stable.

SECURITY

Debt payments are secured by gross revenues of the Obligated Group (OG) and a mortgage on LGMC's property.

KEY RATING DRIVERS

STABLE FINANCIAL PERFORMANCE: Over the last four audited years, Lafayette General Medical Center's operating margin has remained above Fitch's 'A' category median of 2.5%. Debt service was steady, averaging 2.6x over this time, below the category median of 3.8x, reflecting LMGC's historically high debt burden.

DEBT BURDEN MODERATING: Maximum annual debt service (MADS) as a percentage of revenue was 3% at March 31, 2015 and it has come down substantially, due to a combination of revenue growth and acquisitions, since fiscal year end 2011 (Sept. 30 year end), when it stood at an elevated 6.7%. Fitch's 'A' median is 3.1%.

GROWING MARKET FOOTPRINT: Since Fitch's last rating action in 2013, LGMC has added two hospitals and two clinical affiliates, growing its system to six hospitals and six clinical affiliations. The additions have helped LGMC increase its primary and secondary market share to 26.4% in 2014 from 19.5% in 2011. Over this time, inpatient volumes have increased by 40% and revenue has nearly doubled.

ADEQUATE LIQUIDITY: At March 31, 2015, LGMC had $146.4 million in unrestricted cash and investments, which equated to 102.6 days cash on hand (DCOH), an 8.7x cushion ratio, and 70.6% cash to debt. All of these ratios trail their respective 'A' medians, but are sufficient for the rating level.

SIGNIFICANT PROJECTS WINDING DOWN: LGMC completed the final phase of its main campus upgrade with the opening of a new, larger emergency department and the expansion and upgrade of its operating rooms. Fitch expects this to be the last portion of major capital upgrades and significant borrowings for LGMC. Future capital expenditures and potential borrowings should remain manageable at the current rating.

RATING SENSITIVITIES

CONTINUATION OF OPERATING STABILITY: Fitch expects Lafayette General Medical Center to maintain its current levels of operating performance and debt service coverage. Maintenance of current levels of performance and liquidity numbers closer to the median could lead to positive rating pressure. A longer trend of weaker performance could pressure the rating.

SUPPLEMENTAL FUNDING EXPOSURE: Given Lafayette General Medical Center's level of state and federal supplemental funding, especially with addition of University Medical Center, reductions in these funding streams could put negative pressure on the rating.

CREDIT PROFILE

Lafayette General Health System (LGHS) is the corporate parent of LGMC and other members of the obligated group that includes two other hospitals, St. Martin Hospital, Inc. and University Hospital & Clinics, and a durable medical company. The flagship hospital, LGMC, is a 299-licensed bed acute care hospital facility located in Lafayette, LA (approximately 133 miles west of New Orleans and 133 miles east of Beaumont, TX). Fitch's analysis is based on the consolidated system results. In fiscal 2014, the OG comprised 94.6% of the system's assets and 93.6% of its revenues. Total consolidated operating revenues were $495.5 million in fiscal 2014.

STABLE FINANCIAL PROFILE

After a negative operating margin in fiscal 2009, LGMC has produced five consecutive years of above median operating margins. Six month interim fiscal 2015 results have remained consistent with a 3.1% operating margin and an 11.7% operating EBTIDA margin. The stable performance reflects LGMC's service line expansions, including a cancer center opened a few years ago and continued growth in its hub and spoke strategy of regional affiliations with community hospitals that provide LGMC with opportunities for tertiary referrals.

Operating performance has also been helped by the significant growth in revenue, largely driven by system growth through acquisition. From fiscal 2011 to 2014, total operating revenue grew 96%.

Liquidity remains low for the category but is adequate. In addition, total unrestricted cash and investments have grown. Fitch expects LGMC's liquidity to remain stable and moderately grow over the next few years. A drop in liquidity could pressure the rating.

UMC Update

At Fitch's last rating action, LSU University Medical Center, which is a safety net hospital, was just becoming a part LGHS. At the time, there was some credit concern regarding the funding as LGHS had arranged with the state of Louisiana various payment mechanisms, including additional Upper Payment Limit opportunities at LGMC, to provide adequate supplemental funding.

The consolidated performance of the LGHS has not been affected by the addition of the safety net hospital and funding has been as expected from the state. The Louisiana legislature just passed a budget--waiting to be signed by the governor--that would keep the funding stable. However, LGMC's level of exposure to state and federal supplemental funding programs is a credit concern and changes in this funding could impact the rating.

MODERATING DEBT BURDEN

The growth in revenue has helped to moderate LGMC's historically high debt burden. MADS as a percentage was an elevated 6.7% at fiscal year end 2011. However, by March 31, 2015, the solid revenue growth had brought that figure down to 3%, which is below the 'A' median As a result, while LGMC's operating margin was approximately 3.5% for both periods, debt service coverage improved to 3.5x at March 31, 2015, from 2x at year end fiscal 2011.

In addition, with the major upgrades to LGMC's main hospital campus complete, Fitch expects LGMC's debt burden to continue to moderate, with any acquisitions or partnerships financially strong enough to offset any related additional borrowings.

Approximately 71% of LGMC's debt is fixed and there are no outstanding swaps.

DISCLOSURE

LGMC covenants to supply bondholders with quarterly disclosure of financial and operating statements.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

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

U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986574

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986574

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow
Director
Fitch Ratings, Inc.
+1-212-908-9186
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eva Thein
Senior Director
+1-212-908-0674
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow
Director
Fitch Ratings, Inc.
+1-212-908-9186
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eva Thein
Senior Director
+1-212-908-0674
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com