NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating for the following Grundy County Industrial Development Authority debt issued on behalf of Wright Memorial Hospital (WMH):
--$28.6 million health facilities revenue bonds, series 2009.
The Rating Outlook is Stable.
The bonds are secured by a pledge of the unrestricted receivables of the JB Wright Trust (the Trust, owner of WMH and obligor on the bonds), a debt service reserve, and a mortgage lien on hospital property. The bonds are payable primarily from lease payments received by the Trust from Saint Luke's Hospital of Trenton (SLHT), a wholly-owned subsidiary of Saint Luke's Health System (SLHS). SLHS guarantees these lease payments by SLHT.
KEY RATING DRIVERS
SAINT LUKE'S AFFILIATION IS KEY STRENGTH: The 'BBB-' rating is based primarily on WMH's relationship with SLHS, via an operating agreement with SLHS's wholly-owned subsidiary SLHT. SLHT has operated WMH since 1995 via the agreement, which affords WMH many benefits including a guaranty of lease payments of no less than debt service on the series 2009 bonds through 2023.
OPERATING STRUCTURE RISK: The guaranty and operating agreement does not extend through the maturity of the bonds (2034), which Fitch views as a credit risk. The current term of the operating agreement is through 2023 with automatic five-year renewal periods. After the initial term SLHS can terminate the lease with a one-year notice unless there is an event of default.
BETTER OPERATING PERFORMANCE: Relatively steady ambulatory volumes coupled with labor and operating cost controls helped generate a 13.2% operating EBITDA margin in 2014, and 1.5x coverage of maximum annual debt service (MADS). Fitch notes that stronger inpatient volume in the three-month interim period has helped sustain strong cash flow, though WMH's revenue base remains nearly 80% outpatient by gross revenue.
LIQUIDITY DECLINE: Total unrestricted cash and investments fell to $2.1 million in fiscal 2014, driven in large part by approximately $1 million in growth in receivables. As a result, WMH's liquidity metrics fell to a very weak 28.1 days cash on hand (DCOH) and 7.3% cash to debt, from 50.6 DCOH and 12.9% in 2013. Fitch anticipates that final cost report settlements could result in nearly $2 million in reimbursement payments by the end of 2015, bringing liquidity back to historical levels.
CONTINUATION OF OPERATING AGREEMENT: WMH's investment grade rating assumes the extension of the operating agreement beyond its current 2023 term, and ongoing relationship with SLHS. And while not anticipated, a significantly material decline in SLHS' credit profile could also pressure WMH's rating.
WMH is a critical access hospital located in Grundy County, approximately 85 miles northeast of Kansas City, Missouri. Other services include outpatient clinics, inpatient and outpatient surgery, and a rehabilitation program. Total revenues in 2014 were $29.1 million, of which $2.6 million was generated by the Trust.
RELATIONSHIP WITH SLHS
The key rating factor supporting the 'BBB-' rating continues to be WMH's affiliation with SLHS, via an operating agreement which provides for significant benefits including strategic support, management expertise, contract leverage, and a guaranty of lease payments to the Trust equal to debt service requirements on the series 2009 bonds. The guaranty exists in conjunction with the operating agreement, which runs until 2023, with five subsequent automatic renewal periods of five years each.
Although this guaranty is not secured under a master indenture note, it acts as a guarantee by SLHS of debt service payments through 2023 (the bonds mature in 2034). While not publicly rated by Fitch, internal analysis of audited fiscal 2006-2014 and three-month interim 2015 data confirmed SLHS' solid credit profile.
Operating profitability improved modestly in 2014, supported primarily by cost controls rather than revenue growth. Inpatient volumes slipped in 2014, though ambulatory volumes were largely level. Still, operating profitability for 2014 was sustained via good cost controls, with WMH generating a 14% EBITDA margin and 1.6x MADS coverage. Fiscal 2015 operating results are expected to remain steady, and volumes have increased significantly across services through the March three-month interim period. Fitch notes that despite its rural location WMH continues to maintain steady clinical staff levels and leading inpatient market share near 30%.
Despite better operating cash flow, WMH's balance sheet has been impacted by elevated receivables from Medicare and Medicaid as cost reports are settled. Fitch anticipates approximately $2 million in reimbursement for prior periods should bolster WMH's liquidity during calendar 2015, bringing metrics back in line with historical levels and budget expectations. Fitch notes that a very conservative investment mix (100% fixed rate with no equity exposure) coupled with a conservative capital structure alleviates some concern over liquidity.
WMH has $28.6 million in long-term, fixed-rate debt, maturing in 2034. MADS equals $2.5 million, and debt service is level.
WMH covenants to provide audited annual financial statements 180 days after the year-end close and quarterly disclosure 45 days after the quarter close to bondholders via the Electronic Municipal Market Access system (EMMA). Annual disclosure will consist of a balance sheet, income statement, medical staff, revenue sources, and utilization statistics. Fitch has had good access to WMH management, including representative leadership from SLHS and the Trust.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
Dodd-Frank Rating Information Disclosure Form