Fitch Upgrades North Mississippi Health Services' Revs to 'AA' & Affirms ST at 'F1+'; Outlook Stable

NEW YORK--()--Fitch Ratings upgrades to 'AA ' from 'AA-' the long-term rating on the following Mississippi Hospital Equipment and Facilities Authority revenue bonds issued on behalf of North Mississippi Health Services (NMHS):

--$71,630,000 revenue bonds, 2010 series 1;

--$6,325,000 revenue bonds, 2003 series 1;

--$29,175,000 revenue bonds, 2003 series 2;

--$40,000,000 variable-rate revenue bonds, 2001 series 1;

--$16,825,000 variable-rate revenue bonds, 1997 series 1.

Fitch also affirms the 'F1+' short-term rating on the 1997-series 1, the 2001-Series 1, and both series of the 2003 bonds. The 'F1+' rating is based on self-liquidity.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of net revenues of the obligated group (OG), which includes North Mississippi Medical Center, Clay County Medical Corporation, and Webster Health Services, Inc.

KEY RATING DRIVERS

STRONG RECOVERY SUPPORTS UPGRADE: After a negative 6.3% operating margin in FY13 (Sept. 30 year end), NMHS returned to historical performance posting an improved 2.1% operating margin in FY14. The operating performance coupled with NMHS' light debt burden produced maximum annual debt service coverage of 6.2x, above Fitch's 'AA' median of 5.5x. Six month FY15 performance (for OG only) showed continued strength in NMHS' performance.

TURNAROUND EXCEEDS EXPECTATIONS: The downturn in performance was due to staffing challenges in NMHS' hospitalist program, one-time IT implementation costs, and disruption to accounts receivable (AR) and physician coding during the IT rollout. Strong recruitment efforts led to a fully staffed hospitalists program, which helped stabilize inpatient admissions, and NMHS worked through the A/R and coding issues. Further, NMHS has strengthened its relationship with community physicians and working more closely with its community hospitals to help patient volumes. The upgraded IT system has been an important part of this initiative.

ROBUST LIQUIDITY: After NMHS' unrestricted liquidity fell approximately 5% to $539 million in FY13, unrestricted liquidity rebounded to $577 million in the six month FY15 interim period. This equated to 357.2 days cash on hand, a 40.9x cushion ratio, and 333.9% cash to debt, all above Fitch's 'AA' category medians.

MANAGEABLE DEBT BURDEN: MADS as a percent of revenue was 2.1% at March 31 2015, better than the 'AA' category median of 2.6%. NMHS' MADS, currently at $14.1 million, will drop to $10.5 million in 2017.

CAPITAL SPENDING EASING: NMHS is winding down a $55 million capital project that addressed capital needs at its flagship hospital in Tupelo. The project, funded by a 2010 debt issue, involved construction of a new West bed tower that added 140 beds and renovation to the Central bed tower that affected 84 patient beds. With the project over 95% completed and a major IT implementation completed as well, Fitch expects NMHS' capital spending to remain manageable, providing further financial cushion at the higher rating level.

LEADING MARKET SHARE: NMHS has a leading 40% market share in a large 24 county region of northeast Mississippi and southwest Alabama, with its market share supported by a large base of employed physicians, approximately 55% of its active medical staff, including more than 100 primary care physicians.

'F1+' SHORT TERM RATING.:The F1+ rating is supported by NMHS' long-term credit quality and funds available for same-day settlement that exceeds the maximum tender exposure of $99.8 million by 1.25x, consistent with Fitch's criteria.

RATING SENSITIVITIES

STABILITY IN OPERATING PERFORMANCE: Fitch believes the rating should remain stable over the medium term, with North Mississippi Health Services' smaller revenue size for the category and limited geographic diversity limiting any further upward rating momentum. A longer trend of softer operating margins and below median debt service coverage could lead to negative rating pressure.

CREDIT PROFILE

North Mississippi Health Services is a diversified regional health care organization with six owned hospitals and one managed hospital and more than 30 primary and specialty clinics located across the region. Its flagship hospital, North Mississippi Medical Center, is located in Tupelo, MS, and is the largest hospital in Mississippi with 621 staffed beds. Tupelo is located roughly 100 miles southeast of Memphis, TN.

The obligated group (OG) consists of North Mississippi Medical Center, Clay County Medical Corporation, and Webster Health Services, Inc. In FY 2014, the obligated group accounted for 89% of the total assets and 80% of its revenue. Fitch's financial analysis is based on the consolidated statements of the system. Total consolidated operating revenue in FY2014 was $780 million.

Improved Operating Performance

In July 2013, Fitch downgraded NMHS due to a sizable operating loss through the six month interim period, with patient service revenue falling year over year, and management projecting a larger loss by fiscal year end and improved but still challenged operations for FY14.

Following an already weaker year of performance in 2012, with a 1.2% operating margin and a 7.5% operating EBTIDA margin, NMHS finished FY13 with a $46.7 million operating loss and MADS coverage of 1.7x. Historically NMHS had generally produced around a 3% operating margin and a 9% operating EBITDA margin. Fitch's 'AA' category medians are 3.9% and 11%, respectively.

The large operating loss was driven by a variety of one-time items including an IT implementation that added approximately $11 million in additional personnel costs and caused disruptions to both A/R and physician coding. While these losses were unlikely to reoccur, the downgrade also reflected the likelihood of a three-year trend of weaker operating performance and a potentially longer cycle of lower performance.

However, NMHS' materially improved its operating results in FY14, posting $16.3 million in operating income, a $60 million year over year swing in operating income. This reversal in performance significantly exceeded Fitch's expectations. Six month FY15 results show continued improvement in performance with the operating results returning to historical levels.

The improvement was a mix of cost cutting, including an approximately 2% reduction in the workforce, and revenue improvement as the IT issues were worked through and the fully staffed hospitalists program helped stabilize inpatient admissions. As a result, operating expenses were down year over year while patient service revenue grew by 6.3% in FY14.

OG only results for the six month FY2015 interim period show a 6.8% operating margin and 7.9x MADS coverage. OG performance is generally stronger than the consolidated performance. However, Fitch expects the improvements to NMHS' consolidated operating performance to be sustained, as a number of the initiatives, including a focus on its community hospitals, should continue to drive performance.

LIQUIDITY/DEBT PROFILE

Fitch views as major credit strengths NMHS' strong liquidity position and manageable debt. At March 31, 2015, NMHS had $577 million in the six month FY15 interim period. This equated to 357.2 days cash on hand, a 40.9x cushion ratio, and 333.9% cash to debt, all above Fitch's 'AA' category medians of 277 days, 26.5x, and 178.5%, respectively.

At March 31, 2015, NMHS' total outstanding long term debt is approximately $172.8 million. NMHS' debt portfolio is aggressive with approximately 57.5% of variable rate demand bonds supported by self-liquidity and 42.5% fixed rate bonds. NMHS' liquidity relative to the debt offset concerns regarding this level of variable rate bond exposure.

NMHS has two swaps in place with a notional value of $36.4 million that synthetically fix a portion of the variable rate debt. The mark-to-market on the swaps as of March 31, 2015 was ($6.8 million). NMHS' collateral threshold at the 'AA' rating is $20 million.

NMHS' debt burden is manageable as indicated by MADS as a percent of revenue of 1.8% and debt to EBITDA of 2x, at year end FY2014, better than Fitch's 'AA' category medians of 2.6% and 2.9x, respectively. MADS coverage of 6.2x in FY14 was also above the category median of 5.4x. MADS of $14.1 million occurs in the current fiscal year and then will drop to $10.5 million.

Fitch believes the lower MADS coupled with NMHS' already manageable debt burden provides a measure of financial flexibility at the current rating level, relieving pressure on NMHS' operations, which have historically been consistent but below the category medians.

Furthermore, with major capital projects nearing completion at NMHS' main campus, Fitch expects capital needs to remain manageable, with no sizable debt issuances occurring in the near term.

SELF LIQUIDITY RATING

The 'F1+' rating reflects the sufficiency of NMHS' cash and investments position relative to its potential funding obligations on the $92.3 million of weekly VRBDs. At May 31, 2015, NMHS had approximately $368.6 million in available liquid resources (based on Fitch adjustments) of cash, cash equivalents and fixed income investments. Based on Fitch's rating criteria related to self-liquidity, NMHS position of 'eligible cash and investments' available for same-day settlement exceeds Fitch's 1.25x threshold to cover the maximum tender exposure on any given date.

NMHS provides Fitch regular liquidity reports and has a detailed procedures letter in place that delineates the process of liquidating funds in case of a tender.

Disclosure

NMHS covenants to provide annual and quarterly financial information (for the first three quarters) to bondholders. To date, NMHS' disclosure has been timely and accurate.

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

Applicable Criteria

Rating U.S. Public Finance Short-Term Debt (pub. 07 Jan 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=846969

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

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987361

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Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow
Director
Fitch Ratings, Inc.
+1-212-908-9186
33 Whitehall St.
New York, NY 10014
or
Secondary Analyst
Jennifer Kim
Associate Director
+1-212-908-0740
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 St.
New York, NY 10014
or
Secondary Analyst
Jennifer Kim
Associate Director
+1-212-908-0740
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com