NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the rating on the following bonds issued by Norman Regional Hospital Authority (Norman):
--$82.4 million hospital revenue bonds, series 2007;
--$67 million hospital revenue bonds, series 2005;
--$13.1 million hospital revenue select auction variable rate securities, series 1996B.
The Rating Outlook is revised to Positive from Stable.
The bonds are secured by a pledge of the Norman's gross revenues and trustee-held assets.
KEY RATING DRIVERS
IMPROVING FINANCIAL PERFORMANCE AND POSITION: The Outlook revision to Positive from Stable reflects Fitch's expectation of continued solid operating profitability resulting in further liquidity growth and debt moderation. Over the next one to two years, Fitch believes positive rating action is likely as earnings improvements are sustained and the debt burden is reduced.
HIGH, BUT MODERATING DEBT BURDEN: Norman's debt burden continues to abate but is still high as indicated by maximum annual debt service (MADS) equating to 5% of unaudited fiscal 2015 revenues compared to the 'BBB' category median of 3.6%. However, Norman's solid cash flow in unaudited fiscal 2015 resulted in adequate debt service coverage for the rating level at 2.6x.
STRENGTHENING LIQUIDITY: Liquidity continues to grow due to solid operating profitability, lightened capital spending, and the receipt of insurance proceeds from a tornado that destroyed Norman's Moore Medical Center. At the end of fiscal 2015, unaudited unrestricted cash and investments of $184 million amounts to 204 days cash on hand or 90.8% of debt.
LEADING MARKET POSITION: Norman Regional Hospital holds a leading inpatient market share of approximately 53% in its primary service area of Cleveland County compared to about 14% for its closest competitor. Since the city of Norman has ordinances in place that restrict hospital or ambulatory surgery center construction projects that have a negative effect on existing healthcare providers, competitive threats in the primary service area are limited.
STRENGHTENING FINANCIAL PROFILE: As Norman Regional Hospital Authority's profitability remains solid and the debt burden moderates, positive rating action is likely over the next 12-24 months. Maintenance of unrestricted cash balances in-line with 'BBB' category medians after the internal funding of the Moore Medical Center replacement project could result in an upgrade.
The authority is a public trust that was created by the city of Norman to operate Norman Regional Hospital (NRH), a 337 licensed bed acute care hospital. The system is currently composed of NRH and HealthPlex Hospital, a 168 bed hospital located four miles from the main campus that opened in October 2009, as well as the outpatient facility to be located at the former Moore Medical Center about 10 miles north of the city of Norman. Total operating revenue in unaudited fiscal 2015 (June 30 year-end) was $360 million.
SOLID AND IMPROVING PROFITABILITY
After steady profitability during fiscal 2013 and 2014, Norman posted a 3.4% operating margin and 11.5% operating EBITDA margin for the unaudited fiscal 2015 year, which are both favorable to the 'BBB' category medians of 0.6% and 7.7%, respectively. The authority's improving operating performance is attributed to good outpatient volume growth, continued supply cost reduction efforts, reduction in bad debt expenses and a non-recurring Medicare settlement. Financial performance over the last two fiscal years was also affected by the service disruptions from tornado damage at the authority's Moore Medical Center campus. Despite added costs and lower volumes at the temporary facilities, Norman received business interruption and extra expenses insurance proceeds which totaled $6 million in fiscal 2014 and $5.2 million in unaudited fiscal 2015. These monies are expected to be received until the permanent structures at the Moore Medical Center site are completed next year.
HIGH, BUT MODERATING DEBT POSITION
Total outstanding debt was about $202 million as of June 30, 2015 with about 93% fixed rate and 7% auction rate. Fitch's primary credit concern continues to be Norman's high debt burden, which was a result of significant capital spending during 2008 through 2010, including the building of its HealthPlex facility. Per the bond documents, the MADS calculation (higher of the current year debt service or the highest future year on outstanding debt) for unaudited fiscal 2015 is $18 million, down from $18.7 million a few years ago. MADS as a percent of revenue is declining steadily and was 5% of fiscal 2015 revenues, compared to 6.3% in fiscal 2011, but still above the 'BBB' category median of 3.6%. Debt to capitalization is also moderating, amounting to 45.7% in unaudited fiscal 2015 and down from 63.2% in fiscal 2011. The Authority does not have any new money debt plans anticipated over the next several years.
IMPROVING BALANCE SHEET AND LIQUIDITY METRICS
Liquidity grew significantly over the past several years, but is somewhat inflated because of the insurance proceeds received resulting from the tornado that hit Moore Medical Center. At unaudited fiscal 2015 year end, NRH had $184 million in unrestricted cash and investments, equating to 204 days operating expenses, which is well above the 'BBB' category median of 161.5 days. Cash to debt of nearly 91% and cushion ratio of 10.2x are also both improved and are around the respective 'BBB' category median of 89.5% and 11.1x. As of June 30, 2015, liquidity is somewhat inflated since it includes approximately $26 million of remaining insurance proceeds that will be used for rebuilding the permanent structure in Moore. The new Moore facility is being financed entirely by insurance proceeds; however, management is expecting to maintain at least $160 million of unrestricted cash and investments (or about 160 days cash on hand) after the project is funded.
GOOD MARKET POSITION
NRH controls about 53% of the inpatient market in the Cleveland County primary service area, which is a positive credit factor. The city of Norman is located about 20 miles south of Oklahoma City and is anchored by the University of Oklahoma's stabilizing presence. The service area benefits from solid economic indicators, good employment trends and low unemployment rates. For instance, the 3.6% unemployment rate in Cleveland County as of June 2015 compares favorably to the state (4.5%) and national averages (5.3%) during the same time period.
MOORE MEDICAL CENTER UPDATE
A tornado hit the authority's Moore Medical Center on May 20, 2013. The hospital was virtually destroyed and could no longer support operations. No patient or staff injuries occurred from the tornado or the evacuation and all physicians who lost office space were relocated to alternate places within a few days. The site was cleared and temporary structures were established to provide emergency department services and other outpatient programs. Insurance covered all aspects of the destruction including business interruption and extra expense reimbursement. Norman started the construction of a permanent structure, which will include a free-standing emergency department, outpatient laboratory, imaging and therapy, and medical office space. The targeted opening date of the new facility is expected to be late spring 2016. Fitch views the rebuilding project favorably since it replaces a costly inpatient hospital with an ambulatory site that more appropriately meets the community's healthcare requirements. To replace the inpatient services at Moore Medical Center, the Authority built out the fifth floor of its HealthPlex Hospital with an additional 32 beds.
NRHA covenants to disclose quarterly and annual financial information and utilization statistics to the MSRB's EMMA system.
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