CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following rating:
--$92.55 million Jacksonville Health Facilities Authority (FL) (Brooks Health System; BHS) hospital revenue refunding bonds series 2007 at 'A'.
The Rating Outlook is Stable.
RATING RATIONALE:
--BHS has a very strong liquidity position for the rating category, with $191.3 million in unrestricted cash and investments as of June 30, 2010, equating to 734.5 days of cash on hand (DCOH) against Fitch's 'A' rated median of 183.5 DCOH. On a pro forma basis, cash to debt and cushion ratio will fall to 123.3% and 14.9 times (x) respectively, but still exceed respective Fitch 'A' category medians of 105.5% and 14.4x cushion ratio.
--BHS has historically used investment returns to support operations, which has resulted in volatile operating and EBTDA margins and related coverage metrics. This concern is offset somewhat by a move to less aggressive investment allocation in 2009.
--The planned issuance of additional $62.6 million in 2010 and 2011 will add to an already high debt burden and weaker debt service coverage. However, it is offset by ample cash reserves. On a pro forma basis, BHS's cushion ratio and cash to debt positions will drop to 14.9x and 123.3% respectively, against Fitch rated 'A' medians of 14.4x cushion ratio and 105.5% cash to debt.
--Dominant market position for rehabilitative services in North Florida and Southeast Georgia, as illustrated by a market share of 98% for rehabilitative services within the service area in 2009.
KEY RATING DRIVERS:
--A significant deterioration in liquidity combined with failure to improve operating performance would likely result in downward rating pressure.
--Significant changes in CMS's reimbursement methodology for rehabilitative and other post-acute services as a result of healthcare reform could have a material impact on the rating.
SECURITY:
The bonds are secured by a pledge of gross revenues of the hospital.
CREDIT SUMMARY:
The 'A' rating is supported by BHS's strong liquidity measures, and its stable position as the sole provider of rehabilitation services in the North Florida and Southeast Georgia market, its role as one of only two providers of pediatric rehabilitation services in the state. BHS's pro forma liquidity indicators remain strong relative to Fitch's 'A' category medians, blunting the impact of the additional debt. BHS is the dominant provider of rehabilitative services in its services with a 98% market share in 2009, using its position to partner with local acute care hospitals to provide post-acute services.
With the expected borrowing of $62.6 million in tax-exempt bank notes in 2010-2011, BHS's leverage will increase significantly. Pro forma long-term debt of $155.2 million equates to a high 48.9% of capitalization as of June 30, 2010. Maximum annual debt service (MADS) will increase to $12.8 million from $8.6 million, or a high 13.7% of revenues as of June 30, 2010. Proceeds will be used to expand its post-acute service offering via the purchase and planned relocation of a 68-bed skilled nursing facility (SNF) in Jacksonville. Fitch views this strategy favorably, as BHS can utilize its expertise in post acute care to expand its reach within a service area that limits new skilled nursing beds yet sustains a need for providers of these services. That said, while the additional $62.6 million in debt is offset by ample cash reserves, Fitch believes that any further debt issuance would likely have a negative impact on the rating.
Credit concerns include BHS's heavy dependence on investment income to support operating profitability, as well as a high reliance on government payors. Earnings before interest, depreciation and amortization (EBITDA) improved to $7.5 million (7.7% margin) in 2009 compared the -$18.8 million loss (-27.5% EBITDA margin) reflecting the impact of $26.7 million in realized investment losses in 2008 resulting from a change in investment managers. Fitch believes that earnings volatility has been reduced somewhat by greater allocation to fixed income investments.
While BHS generated annual debt service coverage of 1.78x and 1.71x in 2008 and 2009 (as calculated per the MTI which includes realized gains/losses), respectively, Fitch notes that historical coverage of pro forma MADS ($12.8 million) was a light 0.9x by operating EBITDA as of June 30, 2010. Failure to meet rate covenants in 2010 or beyond would likely result in negative rating pressure.
BHS also has a heavy and increasing reliance on government payors (66.2% of gross revenues in 2009), and is susceptible to reimbursement modifications or program changes from CMS given its single specialty focus. While no changes are currently anticipated, should significant changes to reimbursement methodology arise as a result of healthcare reform it would likely have a material impact on the rating.
The stable outlook is supported by BHS's stable position as the sole provider of rehab services within the service area, as well as its very strong liquidity position.
BHS is located in Jacksonville Florida and consists of Brooks Rehabilitation Hospital (157 beds), multi-site outpatient center system Brooks Health Development, Brooks Health Foundation, Brooks Health Care Advantage, a comprehensive home health service, and HH Holdings. In audited fiscal 2009, BHS generated $100.2 million in total revenues. Fitch includes interest and dividends in total revenues, but excludes realized gains/losses which deviates from the audit. BHS has covenanted to provide quarterly disclosure within 45 days of each fiscal quarter end and audited financial statements within 120 days of each fiscal year end to the Municipal Securities Rulemaking Board's EMMA system. Fitch notes that disclosure has been timely and thorough.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from the Obligor.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated 16 Aug. 2010.
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated 29 Dec. 2009.
For information on Build America Bonds, visit www.fitchratings.com/BABs
Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606
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KEYWORDS: United States North America New York
INDUSTRY KEYWORDS: Health Hospitals Other Health
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