NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded to 'BBB' from 'BBB-' the rating on $45,490,000 revenue bonds, series 2007, issued by Cass County, Missouri on behalf of Cass Regional Medical Center (Cass).
The Rating Outlook is Stable.
The bonds are secured by a pledge of net revenues (includes funds from county appropriations that is based primarily on a property tax levy) and a debt service reserve fund.
KEY RATING DRIVERS
OVERALL FINANCIAL STRENGTHENING: The upgrade to 'BBB' from 'BBB-' is a result of consistent improvement in financial performance reflected in robust profitability, liquidity growth, and debt moderation. At the fiscal year ended Dec. 31, 2015 (unaudited interim results), most key metrics measuring profitability, liquidity, and debt compared favorably against the 'BBB' medians.
RELATIONSHIP WITH HCA: Providing further credit stability is a long-standing management agreement with HCA (Issuer Default Rating of 'BB'; Outlook Stable), which brings management expertise and lends certain benefits from size and scale. The current agreement runs through 2017 and is expected to be renewed without material changes.
CRITICAL ACCESS DESIGNATION: Fitch largely attributes Cass's historically stable financial results to the organization's critical access hospital (CAH) designation, which provides favorable reimbursement to small rural facilities.
LIMITED CAPITAL PLANS: Capital spending is estimated at $2.2 million for fiscal 2016, mostly for routine maintenance and upgrades (below half of 2015 depreciation). Combined with projected profitability, continued liquidity growth is expected.
SMALL REVENUE BASE: Cass's small revenue base of $66.3 million in fiscal 2015 (unaudited interim results) poses inherent credit risks including vulnerability to fluctuations in medical staff size, utilization trends, and payor mix.
SUSTAINED PERFORMANCE EXPECTED: Given Cass's operating platform, CAH designation, and limited capital plans, Fitch expect Cass to sustain strong financial performance and further strengthen its financial cushion.
POTENTIAL LEGISLATIVE CHANGES: Cass is inherently exposed to potential changes in the CAH program, which would likely have a negative impact on financial results. Management does not anticipate any issues with the recertification checklist released by the Centers for Medicare and Medicaid Services in February 2016. Further, should there be major changes to the program, they are likely be implemented with a transition period.
Cass Regional Medical Center is located in Harrisonville, MO, approximately 37 miles southeast of Kansas City. Cass is a designated CAH with 25 acute care beds, a 10-bed behavioral health unit, and a level III trauma center. Other entities include family practice clinics and several employed clinicians. Total operating revenues were $66.3 million in 2015.
Stable Operating Platform
Cass derives material benefits from its CAH designation as well as the HCA relationship. The CAH program provides favorable reimbursement levels and some insulation from revenue pressure related to healthcare reform. However, there have been discussions at the federal level that may impact reimbursement levels or program eligibility requirements that may negatively impact Cass. Management has been proactively planning for potential impact from such changes, such as preparing for value based reimbursement, improving patient and staff satisfaction, and maintaining financial strength.
While Cass operates as a standalone CAH, the organization benefits from the management agreement with HCA, which provides access to HCA's expertise on contract negotiations, compliance, recruiting, and strategic planning. Fitch believes this relationship has historically added strength and stability to Cass, as well as access to a broader clinical network in the service area.
Overall volumes have generated stable revenue growth, but the mix continues to shift. Inpatient admissions declined for the second year with sustained rise in observations, and overall patient traffic continues to shift to the outpatient setting. While there has been some market share weakening due to the growing encroachment of Kansas City based providers into Cass's service area, overall volumes support stable operations. Management reports outpatient volume growth has been beneficial to overall financial results, as it tends to have a more favorable payor mix.
Profitability has historically been very strong, supported by a combination of stable operations, good expense management, favorable reimbursement from the CAH designation, and receipt of county appropriations. Operating margin averaged 5.9% over the last five fiscal years, and was most recently reported at 7.3% compared to the 'BBB' median of 0.6%. Similarly, operating EBITDA margin averaged 17.7% for five years, and was 18.7% in fiscal 2015 compared to the median of 7.7%.
County appropriations have been steady at approximately $1.8 million a year and are included in other operating revenue. Excluding these funds, 2015 operating and operating EBITDA margins would have been 4.6% and 16.3%. Budgeted operating income for 2016 is $2.7 million before tax revenues (4% operating margin) and $4.8 million after tax revenues (7.1% operating margin), which are very close to 2015 results and Fitch believes is achievable.
Continued Liquidity Growth
Unrestricted cash and investments more than doubled over the last five years, totaling $51.2 million at Dec. 31, 2015. Consistent growth is primarily attributable to robust cash flows and limited capital spending over that period. Days cash on hand of 328, 14.6x cushion ratio, and 112% cash to debt all compare favorably against the 'BBB' medians of 162 days, 11.1x and 89.5%. Cass does not currently have any plans for additional debt.
Cass has one series of fixed rate bonds outstanding in the amount of $45.5 million with a maximum annual debt service (MADS) of $3.5 million. MADS equated to a high 5.3% of 2015 revenues against the median of 3.6%. However, other measures of capital compare favorably against respective medians largely due to strong cash flows and overall balance sheet position. Debt to EBITDA of 3.5x and 42.2% debt to capitalization are stronger than the respective medians of 4.4x and 48.1%.
Despite a relatively high MADS, coverage has been very consistent, at or above 3x over the last six years and most recently at 3.7x in 2015. Cass is not party to any swaps.
Cass covenants to provide audited financial statements within 150 days after the year-end close and quarterly disclosure within 45 days of quarter close to the municipal securities rulemaking board'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