NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BB+' rating on the following Health Care Authority of Cullman County bonds issued on behalf of Cullman Regional Medical Center (CRMC):
--$68.8 million revenue bonds, Series 2009A.
The Rating Outlook is Revised to Negative from Stable.
The bonds are secured by a pledge of gross revenues, a mortgage, and a debt service reserve fund.
KEY RATING DRIVERS
OPERATING VOLATILITY: The Outlook revision to Negative is driven by CRMC's poor operating performance in the fiscal year ended June 30, 2011, due to ineffective revenue cycle management and flat utilization that resulted in a decline in net patient revenue. Fiscal 2011 follows several years of operating losses, which have continued into the first quarter of fiscal 2012.
REVENUE CYCLE CHALLENGES: CRMC's revenue collection and operating cash flow continue to be hindered by the inability to efficiently bill and collect for its services, which presents significant credit concern. This is further exacerbated by a challenging payor mix and large levels of bad debt. CRMC has decided to outsource the billing and collection function as of Jan. 1, 2012.
WEAK COVERAGE METRICS: As calculated by Fitch, CRMC's coverage of maximum annual debt service (MADS) coverage by EBITDA dropped to a marginal 1.2 times (X) in fiscal 2011, improving slightly to 1.7x in the interim period.
ELEVATED DEBT LEVEL: CRMC's debt burden is considerable, and its balance sheet provides only limited flexibility against operating volatility. Its bonds are 100% fixed rate, and CRMC has no plans for additional issuance.
SOLID MARKET POSITION: CRMC's position as the only community hospital in Cullman County provides for a leading market position and makes CRMC a sought-after partner for acute providers in Birmingham and Huntsville.
WHAT COULD TRIGGER A RATING ACTION
LACK OF REVENUE GROWTH: A failure to address revenue cycle issues within the next 12 months, resulting in top line revenue growth and improved profitability, would likely result in negative rating action.
The Outlook Revision to Negative reflects CRMC's poor operating performance, which has been volatile historically. Fiscal year ended June 30, 2011 results were weak, with CRMC generating a negative 4.1% operating margin and a 5.8% EBITDA margin, both below Fitch's non-investment grade medians of 0.4% and 5.8%, respectively. Weak performance was driven primarily by flat utilization and revenue cycle challenges. Fiscal 2011 revenues were 0.7% below 2010 levels, while total expenses increased 1.9% over the prior year. While better expense controls have since generated marginal improvement, CRMC is still operating at a loss, with a negative 1.0% operating margin and 8.3% EBITDA margin in the three-month interim period ended Sept. 30, 2011.
CRMC's fiscal 2012 budget includes an operating income of $660 thousand or 0.6% operating margin, and the Outlook revision reflects in part Fitch's belief that CRMC will be challenged to meet it. However, further negative rating action is precluded at this time by the significant upside potential related to the changes CRMC's has now implemented to its revenue cycle function in addition to other revenue improvement initiatives.
In fiscal 2011, CRMC's audit uncovered deficiencies related to its revenue collection practices. CRMC has restructured its finance division, and will outsource its patient financial services function to Huntsville Hospital, effective Jan. 1, 2012.
As of Sept. 30, 2011 days in accounts receivable was 69.7 days, which has always been very high, ranging from 70-80 days historically. A challenging payor mix presents additional collection difficulties, as evidenced by CRMC's very high bad debt expense reflecting 19.6% of revenues through the interim period, as well as rising Medicaid and self-pay payors.
Coverage metrics declined in fiscal 2011, reflective of weakened operating performance. CMRC covered MADS at 1.2x by EBITDA and 0.8% by operating EBITDA, as calculated by Fitch, which includes lease obligations. As calculated under its master indenture, CRMC generated 1.52x coverage, ahead of it's 1.10x covenant requirement.
The overall debt level is elevated, as evidenced by debt to capitalization of 83.8% and debt to EBITDA of 7.1x through the three-month interim period, against Fitch's non-investment grade medians of 54.6% and 5.0x, respectively. CRMC's liquidity position provides minimal cushion with 100.3 days cash on hand (DCOH) and 35.4% cash to debt at Sept. 30, 2011 but has remained largely stable from 109.9 DCOH and 41.7% cash to debt at fiscal 2011. CRMC has no plans for additional debt.
CRMC has a stable market position as the only acute community hospital in Cullman County, which provides for a leading position and good relationship with regional payers and tertiary referral centers. An affiliation with a tertiary provider would be a credit positive, and CRMC is currently weighing options from various systems. Fitch will continue to monitor any formal changes as they arise.
CRMC is an acute care general hospital with 145 licensed beds (115 beds in service), located in Cullman, AL, which is 50 miles north of Birmingham. CRMC is designated as a Level III trauma center and the only provider of interventional cardiology services through an affiliation agreement with University of Alabama Medical System at Birmingham (UAB) between Birmingham and Huntsville. Total revenues were $116.4 million in fiscal 2011, excluding bad debt expense. The hospital covenants to disclose quarterly unaudited (within 60 days) and annual audited financial statements (within 120 days) including management discussion and analysis by to the Municipal Securities Rulemaking Board's EMMA System. Fitch believes that CRMC disclosure practices are very good.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
This action was informed by the sources of information identified in the 'Revenue-Supported Rating Criteria'.
Applicable Criteria and Related Research:
'Revenue-Supported Rating Criteria', dated Jun. 20, 2011;
'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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INDUSTRY KEYWORDS: Health Hospitals Professional Services Finance