NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded to 'BBB-' from 'BBB' the following Christian County, KY hospital revenue and refunding bonds issued on behalf of Jennie Stuart Medical Center (JSMC):
--$60.1 million series 2006.
The Rating Outlook is Negative.
The bonds are secured by the gross revenues of JSMC, a mortgage on hospital property and a debt service reserve fund.
KEY RATING DRIVERS
ONGOING NEGATIVE PERFORMANCE: The downgrade to 'BBB-' is driven by JSMC's three years of negative operating performance. In 2015, JSMC had a negative 6.1% operating margin ($7 million operating loss) and a 3% operating EBITDA margin, both significantly below Fitch's 'BBB' category medians of 0.6% and 7.7%, respectively. Four-month 2016 results show a negative 4% operating margin.
THIN DEBT SERVICE COVERAGE: Poor operating performance has resulted in low debt service coverage of 1.1x in 2014 and 2015, compared to the 2.7x median. Coverage improved slightly to 1.5x through the four-month interim period (ended April 30, 2016). JSMC's debt burden is elevated with maximum annual debt service (MADS) equating to 4.3% of 2015 revenues, which compares unfavorably to Fitch's 'BBB' median of 3.6%.
ADEQUATE LIQUIDITY POSITION: At April 30, 2016, JSMC's $46.5 million in unrestricted cash and investments, equated to 144.2 days cash on hand (DCOH) and 78.8% cash compared to the 'BBB' medians of 161.5 days and 89.5%, respectively. Liquidity has remained largely stable over the last three years and is a key credit strength at the rating level.
VANDERBILT AFFILIATION: JSMC signed an affiliation agreement with Vanderbilt University Medical Center (Vanderbilt) in 2016, with JSMC becoming part of Vanderbilt's Clinically Integrated Network. Under the agreement, Vanderbilt will assist JSMC with several specialty service lines including oncology and cardiology. Fitch views the affiliation positively and believes it should benefit JSMC's quality indicators, physician specialty coverage, and financial results over the medium term.
LEADING MARKET POSITION: JSMC has a leading market share of 64.5% in its primary service area (PSA), which has remained stable over the last three years. However, the service area remains economically challenged, as JSMC's payor mix consisted of 23.3% Medicaid in 2015.
OPERATING IMPROVEMENT EXPECTED: The 'BBB-' rating is contingent upon operating improvements in 2016 and 2017 and continued stability of liquidity levels. A revision of the Outlook to Stable is possible if Jennie Stuart Medical Center is able to significantly improve operations through cost reduction initiatives and benefits associated with receipt of Sole Community Status and Wage Index reclassification.
JSMC is a 194 licensed bed inpatient acute care hospital located in Hopkinsville, KY, approximately 70 miles north of Nashville, TN. JSMC had total operating revenues of $113.9 million in 2015.
WEAK OPERATING PERFORMANCE
JSMC's operating losses of $8.1 million in 2014 and $7 million in 2015 equated to negative 7.4% and 6.1% operating margins, respectively. The operating losses are attributed to declining inpatient volumes and significant losses at JSMC's employed physician practice. Management has developed a cost reduction and process streamlining initiative in regards to its physician group in 2015. The initiative is currently being implemented and all physician contracts that come up for renewal are being reviewed and renegotiated to reflect current market conditions and productivity.
JSMC's operating margin improved slightly to a negative 4% through the four-month interim period, and management is budgeting to end 2016 with a negative 3.2% operating margin.
JSMC was approved for Sole Community Provider (SCP) status in April of 2016. The approval is retroactive to Jan. 1, 2015 and JSMC is expecting to receive a lump sum payment of approximately $1.5 million for the retroactive portion. The annual benefit going forward should be in excess of $800,000.
Furthermore, JSMC received approval for reclassification into the Nashville MSA, which will increase its wage class index reimbursement level, with an estimated net operating benefit of approximately $2 million annually. Neither the SCP status nor the MSA reclassification is incorporated in the 2016 budget. Fitch views the realization of the financial benefits from both programs as essential to maintaining the rating and the Stable Outlook.
ELEVATED DEBT BURDEN
JSMC's debt service is level with MADS of approximately $4.9 million, which equated to an elevated 4.3% of total 2015 revenues. Additionally, poor operating performance has resulted in elevated Debt to EBITDA of 11.2x in 2015, compared to Fitch's median of 4.4x. Debt to EBITDA improved to 7.9x through the four-month interim period.
Debt service coverage was a very low 1.1x in 2014 and 2015, significantly below Fitch's median of 2.7x and in violation of JSMC's debt service coverage covenant of 1.25x. JSMC received a waiver for an alleged event of default for 2014 and a waiver of the coverage covenant for 2015 from Assured Guaranty (Insurer) and the U.S Bank National Association (Trustee; rated 'AA'/Outlook Stable by Fitch). Additionally, the coverage and liquidity covenants were revised as follows: minimum coverage of 1.15x and DCOH of 100 for 2016, coverage of 1.2x and DCOH of 80 for 2017 and coverage of 1.25x and DCOH of 80 for 2018 and beyond. Debt service coverage was a stronger 1.5x through the four month interim. The waiver was granted as a result of negotiations between JSMC and Assured Guaranty regarding the modification of the debt service coverage calculation formula.
Capital spending has been tempered over the last three years, averaging at just 57% of annual depreciation. Lower capital expenditures resulted in an increased average age of plant of 15.6 years in 2015, comparing unfavorably to Fitch's median of 11.4 and indicative of deferred capital spending. While management is not planning any large projects over the medium term, any capital expenditures that requires large cash outflows or issuance of additional debt, may pressure the rating.
The 2006 bonds are fixed rate and are insured by Assured Guaranty. JSMC has an outstanding basis swap with Bank of America in the notional amount of $60.1 million. The mark-to-market on the swap was $2.4 million at April 29, 2016, and there is no collateral posting requirement if DCOH is above 95 days.
JSMC covenants to disclose audited annual information within 150 days of fiscal year end to the Municipal Securities Rulemaking Board's EMMA system. JSMC also discloses quarterly statements to EMMA, and Fitch notes that disclosure has been timely and thorough.
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