CHICAGO--(BUSINESS WIRE)--Fitch Ratings has upgraded the rating on North Carolina Medical Care Commission bonds issued on behalf of Halifax Regional Medical Center (HRMC) as follows:
--$12.4 million hospital revenue bonds series 1998, to 'BB+' from 'BB'.
HRMC has an additional $6.2 million in series 2011 direct placement bonds which Fitch does not rate.
The Rating Outlook remains Positive.
The bonds are secured by a pledge of gross receipts, a negative mortgage lien, and a debt service reserve.
KEY RATING DRIVERS
BETTER PROFITABILITY: The upgrade and maintenance of a Positive Outlook reflects improved operating profitability which is likely to be sustained. Through the eight-month interim period ended May 31, 2015 HRMC generated a 3.9% operating and 9.8% operating EBITDA margin, continuing a trend of better operating performance in 2013 and 2014.
RELATIONSHIP WITH NOVANT: Though the proposed merger was called off, HRMC will maintain its management agreement with Novant Health (revs rated 'AA-'/Outlook Stable by Fitch) which has been extended to March 1, 2017. Thus far the agreement has helped HRMC implement cost-savings initiatives, and support its strategic planning efforts.
LOW DEBT BURDEN: HRMC maintains a light debt burden, allowing for healthy debt service coverage against somewhat volatile operating performance. MADS equates to 2.4% of fiscal 2014 revenues which HRMC covered at a solid 3.3x.
HEALTHY BALANCE SHEET: HRMC's unrestricted liquidity increased over 25% in 2014 over prior year, and another 4% at the eight-month interim period ended May 31, 2015. With 112.3 days of cash on hand (DCOH) and 124.5% cash to debt, HRMC's liquidity metrics are strong for the rating category and provides a solid financial cushion against HRMC's small revenues size.
MIXED SERVICE AREA CHARACTERISTICS: While HRMC's long-standing position as a sole community hospital and market share leader is a significant credit strength, the service area's overall socioeconomic profile is generally unfavorable. HRMC is exposed to a high level of government/self-pay revenues, equal to 71% of its gross revenues through May 2015.
SUSTAINED FINANCIAL PERFORMANCE: Fitch expects the management agreement with Novant will be extended beyond 2017. Sustained improvement in operating performance consistent with 2014 and YTD 2015 will likely trigger an upgrade.
HRMC is a 204 licensed-bed community medical center providing primary and secondary care services. The medical center is located in Roanoke Rapids, approximately 75 miles northeast of Raleigh. The system also includes a medical group and a foundation. In fiscal 2014 (Sept. 30 year-end) HRMC had $88 million in total operating revenue.
Fitch uses the consolidated financial data in its analysis. The obligated group includes the medical center, which makes up substantially all assets and 94.9% of total revenues in fiscal 2014 (Sept 30).
Despite not consummating a merger with Novant Health as expected in 2014, HRMC renewed its management services agreement with Novant through February 2017. Fitch believes the management agreement with Novant has resulted in improved financial performance through strong expense control and improved operating efficiency. In fiscal 2014 and through the eight months ended May 31, HRMC generated operating margins of 1.3% and 3.9%, respectively. Operating EBITDA margins have improved to 7.9% and 9.8% in 2014 and through the interim period, respectively, following operating EBITDA margins averaging 4.5% in the prior three years. Overall, the affiliation with Novant is viewed positively, as it should support HRMC's strategic and operational initiatives going forward.
Fitch remains concerned regarding HRMC's payor mix and flat revenue trends, though it notes that insurance exchange enrollment (in early 2014) has been largely positive in reducing bad debt expense and increasing some clinical volume. Overall however, HRMC's gross patient revenue mix is constrained, with over 70% government pay and another 7% self-pay as of March 31, 2015. In addition, the nearly $3.5 million in state supplemental payments HRMC receives are not certain beyond 2016.
Total debt equaled $20.4 million at fiscal 2014, including $1.6 million in capital leases and notes payable. HRMC's debt profile is manageable and conservative, with 100% fixed rate debt and no swaps/derivatives. Including approximately $500,000 in capital lease payments, maximum annual debt service equals $2.1 million. By HRMC's calculation, which is based on indenture definitions and reflects the obligated group, debt service coverage as of Sept. 30, 2014 audit was 3.99x. Routine capital near $3-5 million should be supported by operating cash flow, with no additional debt plans.
Disclosure to Fitch has been adequate including annual (within 120 days) and quarterly disclosure, although only audited annual disclosure is required in the bond documents. HRMC does provide quarterly disclosure upon request to other third parties. Fitch notes that quarterly disclosure includes a balance sheet and income statements; however, a statement of cash flows and management discussion and analysis is not provided.
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