NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on the following debt issued by the Mississippi Hospital Equipment & Facilities Authority on behalf of Forrest Health (FH), MS:
--$70 million hospital revenue bonds (Federally Taxable - Build America Bonds - Direct Payment) series 2010;
--$37.75 million hospital revenue refunding bonds series 2009.
The Rating Outlook is Stable.
Debt payments are secured by a pledge of the gross revenues of the obligated group.
KEY RATING DRIVERS
SOLID, LEADING MARKET POSITION: FH's owes part of its strong operating results to its leading market position in the 10-county primary service area. The hospital's flagship hospital in Forrest County serves as the tertiary referral center for FH's smaller regional hospitals. FH's market share of 56.7% is significantly above the 15.4% market share for its closest competitor, Merit Health Wesley (Wesley).
IMPROVED OPERATING PROFILE: FH has posted increasingly improving financial results since 2013. Operating margin and operating EBITDA margin were 6.1% and 14%, respectively, in fiscal 2015 and 7.7% and 15.3% in the first nine-months of fiscal 2016 (June 30), exceeding the medians for this rating category.
SOUND BALANCE SHEET SUPPORTS RATING: The improved profitability of the past two years combined with more moderate capital budgets and decreasing debt, has resulted in strengthened balance sheet indicators. Cash-to-debt is 179.5% as of June 30, 2016 and days cash on hand (DCOH) is measured at 238.2 days for the same period. Debt coverage has improved to 5.3x with the moderating debt burden.
CHALLENGING PAYOR MIX: FH's payor mix is unfavorable with almost 25% of gross revenue from Medicaid and self-pay. The state's decision not to expand Medicaid under the Affordable Care Act (ACA) has been negative for FH as there has been a reduction in Medicare disproportionate share funding (DSH) without any benefit from reduced uncompensated care. Medicare DSH declined from $13.5 million in fiscal 2014 to $11.00 million expected for fiscal 2016. FH is also highly dependent on the supplemental payments from the Mississippi Hospital Access Program (MHAP), and the uncertainty around the future terms of this program continues to be a credit concern.
CONTINUED PROFITABILITY: Absent any significant new debt or unanticipated large capital projects, if Forrest Health (FH) maintains high EBITDA margins and increases liquidity again in 2017, a positive outlook may be considered.
Forrest Health owns and operates three hospitals including Forrest General Hospital (FGH), a 410-staffed bed, Level II trauma acute-care hospital, with an 88-bed chemical dependency and psychiatric facility, 24-bed rehabilitation unit, and 20 bed skilled nursing facility located in Hattiesburg, MS, the 30-bed Orthopedic Institute in Hattiesburg, and the 60-bed Highland Community Hospital (Highland) in Picayune, MS. FCGH also operates, but does not own, Walthall County General Hospital in Tylertown, MS, Jefferson Davis Community Hospital in Prentiss, MS, and Marion General Hospital in Columbia, MS. Total revenue in fiscal 2015 (Sept. 30 year end) was $515.8 million.
MARKET DYNAMICS, HATTIESBURG CLINIC
FH is the leading hospital in the service area, but it is not the main provider of healthcare services in its area. The Hattiesburg Clinic (Clinic), with 455 practitioners (291 physicians), is a large multi-specialty clinic and an important partner to FH. Management reports a good relationship with the Clinic, with the interdependence between the two organizations deepening in recent years.
Fitch recognizes the importance of FH's relationship with the Clinic and the Clinic's contribution to FH's volume and financial results. However, Fitch notes FH's growing reliance on the Clinic with the Clinic accounting for approximately 85% of the volume at FGH. The Clinic is a significant smaller portion of the operations at the 211-bed Wesley competitor, with many of the Clinic specialists practicing exclusively at FH. Given Wesley's presence in Hattiesburg, there is another hospital option should the relationship between the Clinic and FH change in the future. However, FH offers higher acuity services and shares a single medical record system (Epic) with the Clinic.
Additionally, FH has very few employed or aligned primary care physicians as the primary physicians in Hattiesburg are predominantly employed by the Clinic. The Clinic has its own ACO and network of physicians, which may make it harder for FH to control certain indicators and measurements for future value-based payments and penalties. FH's management participates in ACO planning and strategy discussions and there may be an opportunity for further collaboration or partnership between FH and the Clinic's ACO.
HUB AND SPOKE MODEL
FH benefits from its hub and spoke model, increasing referrals to the flagship from the small regional hospitals, most of which are critical access hospitals (CAH). Highland, not a CAH, has struggled to break-even; recently due to turnover in a couple of key clinical positions. Nevertheless, the contribution margin and increased referrals to FGH from that area in 2016 still make Highland accretive to FH. Recruitment to the service area continues to be an overall challenge, but FH is hoping to leverage its recent family practice residency program and retain future graduates.
In 2015, FH purchased the orthopedic hospital that it previously leased from an orthopedic group in the area, Southern Bone and Joint. The transaction was financially neutral in 2015 as the capital lease for the orthopedic hospital was already on FH's book, although it will generate interest cost savings over the life of the debt. The Orthopedic Institute has proven to be profitable for FH with inpatient and outpatient surgeries growing over the past years. Although Southern Bone and Joint retained some outpatient surgical capacity in the building connected to the Orthopedic Institute, the group primarily performs its surgical procedures at FH's owned orthopedic suites. The Clinic's orthopedic surgeons also operate in FH's suites at the specialty hospital. FH is projecting 2,394 inpatient and 2,110 outpatient orthopedic surgery cases in 2016 at FGH and the Orthopedic Institute.
STRONG FINANCIAL PROFILE
FH's financial position has improved in recent years due to its referral base, positive relationship with the Clinic, orthopedic growth, and stable supplemental payments from the MHAP program. Operating EBITDA margins of 14% in fiscal 2015 and 15.3% in the first nine months of fiscal 2016 have facilitated robust cash flow to fund modest capital expenditures and grow liquidity. Total unrestricted cash and investments was $300.9 million at June 30, 2016, which translated to 238.2 DCOH and 179.5% cash to debt compare well to the 'A' category medians of 215.5 days and 148.6%, respectively.
FH has a conservative budget for 2017, but results are still expected to be relatively in line with 2015 and 2016. The 2017 budget contemplates funding an additional $20 million contribution to the pension to bring the funding level to 80%. The pension liability was funded at 74% at the end of fiscal 2015.
MODERATING DEBT METRICS
FH had total debt of $167.7 million as of June 30, 2016, which includes approximately $106 million of bonded debt, $26 million of capital leases and $35 million of bank debt. FH's debt portfolio is 100% fixed rate and includes a series of Build America Bonds (BABs). The debt service requirements on the BABs are treated net of the subsidy and interest expense is also net of the subsidy. FH also has a basis swap outstanding that has a collateral threshold requirement of $15 million.
Debt service is front loaded with maximum annual debt service (MADS) of $16.3 million in fiscal 2017, which declines to $13.0 million as of fiscal 2018. MADS coverage was 5.3x through the nine months ended June 30, 2016 compared to 4.7x in fiscal 2015, 2.1x and the 'A' category median of 4.5x.
FH is not planning to issue new debt, although it may convert the lease on a current administrative building into long-term bank debt if it bids successfully for ownership of the building.
FH covenants to disclose quarterly and annual financial information and utilization statistics to the MSRB's EMMA system.
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Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
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