<0> Fitch Affirms Dimensions Health Corporation's (MD) Rev Bonds at 'CC' </0>
Fitch RatingsPrimary AnalystEva TheinSenior Director+1-212-908-0674Fitch Ratings, Inc.One State Street PlazaNew York, NY 10004orSecondary AnalystMichael BurgerSenior Director+1-212-908-0555orCommittee ChairpersonEmily WongSenior Director+1-212-908-0651orMedia RelationsElizabeth Fogerty+1-212-908-0526
Fitch Ratings affirms the 'CC' rating on the approximately $56.6 million Prince George's County, MD project and refunding revenue bonds series 1994 issued on behalf of Dimensions Health Corporation (DHC). DHC is the operator of three county-owned facilities known as Dimensions Health System (DHS).
Debt payments are secured by a pledge of the gross revenues of the obligated group and a fully funded debt service fund.
KEY RATING DRIVERS
HEIGHTENED RISK UNTIL LONG-TERM PLAN IMPLEMENTED: DHS' financial performance continues to be dependent on annual appropriations from the county and state. The need to secure a long-term solution, which requires finding sufficient sources of funding for its significant capital needs, is essential for DHS' long-term viability.
TRANSFORMATION OF DHS: The implementation of the memorandum of understanding (MOU) between DHS, the state of Maryland (the state), Prince George's County (the county), the University of Maryland Medical System (UMMS; rated 'A', Stable Outlook) and the University System of Maryland (USM; rated 'AA+', Stable Outlook), with the goal of reorganizing DHS, continues to be on track. A certificate of need (CON) for a new facility is expected to be submitted in the fall of 2013. So far, two thirds of the necessary funding has been committed to by the state and the county, subject to appropriations. The remaining funding will come in the form of reimbursement rate relief from the Maryland Health Services Cost Review Commission (HSCRC).
NO FINANCIAL FLEXIBILITY: DHS' financial profile continues to be precarious, as reflected in the going concern language in its audits since 2005. DHS is reliant on county and state funds to support its operations. The county and state have pledged to continue to provide $30 million of annual financial assistance in the form of grants, subject to appropriations, until 2015, by which time it is expected that a permanent plan for the transformation of DHS will be in place.
IMPLEMENTATION OF OPERATIONAL IMPROVEMENTS: Management is focused toward streamlining system operations in order to reduce operating losses and increase revenues and has targeted $7 million of additional revenues and $5 million of expense reductions to be accomplished over the next 18 months.
UNLIKELY RATING MOVEMENT UNTIL LONG TERM PLAN FINALIZED: Although the partnership to transform DHS is viewed favorably, it is unlikely that a rating change will occur until a definitive plan to address DHS' financial and capital needs has been finalized and the sources of payment for implementation have been secured.
The affirmation of the 'CC' rating reflects DHS' stressed financial situation which requires the ongoing financial support of the state and the county (both rated 'AAA' with a Stable Outlook by Fitch) in order to meet its financial and bond payment obligations.
Reflecting the essentiality of DHS' role as the safety net provider, both the state and the county have provided grant support to DHS of $15 million each for fiscal 2013 and it is expected that this level of support will be maintained until 2015, subject to appropriation approval, in order to enable DHS to continue to meet its operating needs, albeit at minimal levels, and debt service payments. The state has also appropriated an additional $24 million for DHS' capital needs over the 2013-2015 period, the bulk of which will be spent on renovations to the Laurel and Bowie campuses.
Fitch views as positive the July 21, 2011 announcement of a partnership between DHS, the state and the county and UMMS for developing a comprehensive plan to provide for health care needs of county residents, which is intended to address the long-standing financial and capital needs of DHS. One of the articulated goals of the partnership is the plan to build a new regional medical center and health sciences campus to be located in central Prince George's County, which would augment and/or replace some of DHS' existing facilities. However, this solution will require the sharing of the cost by the state, county and assistance in the form of rate relief from the HSCRC.
UMMS has already completed an initial study of the health care needs of the county's population, which indicated the need for a new facility and for an additional 61 primary care physicians. The cost of the new facility, now downsized to 259 inpatient beds and 19 observations beds, is estimated at approximately $645 million, which includes construction costs, cost of land acquisition and working capital. Several potential sites have been identified, one of which is already county owned and a final decision will be made in May. The ultimate plan will also need to address approximately $100 million of DHS' unfunded pension, outstanding debt and unfunded retiree benefits before 2017, and will also require a transfer of the ownership of DHS' assets from the county to the new entity. The next phase of the plan, presently underway, is firming up the funding sources for the new regional facility. The state and the county have already committed to each contribute approximately $200 million to the project, with the State contribution expected to be appropriated in stages over the next five years. The remaining funding will come in the form of reimbursement rate relief from the HSCRC. The current timetable envisions a CON to be submitted by the fall of 2013.
DHS' Prince George's Hospital Center serves as one of two safety net hospitals in the county, which together with other system inpatient and outpatient facilities provide for the essential health care needs of the underinsured and indigent population of the service area. The system has a history of extremely weak financial performance with liquidity and operating metrics consistently at or below Fitch's investment grade medians, when excluding the impact of the grant support. DHS' audited financial statements have been receiving 'going concern' opinions since 2005.
DHS continues to implement a financial improvement plan and management targeted $7 million of additional revenues and $5 million of expense reductions to be accomplished over the next 18 months. As planned, 61 beds of the Gladys Spellman Specialty Hospital and Nursing Center (Gladys Spellman) long term care facility were sold in October 2012 for $467,500 to a for-profit operator (Genesis Healthcare). The remaining 46 chronic care beds were transferred to Laurel Hospital and management reports positive results from the improved reimbursement base. The proceeds of the sale will be used to repurpose the Gladys Spellman facility for family services, physician offices and various other outpatient uses.
DHS ended fiscal year 2012 (year end June 30) with a positive operating income of $11.9 million, equal to an operating margin of 3.3% and operating EBITDA margin of 6.9%. Fitch includes grant funds, which were $31.3 million in 2012, in operating income. Excluding the grant revenues, DHS would have reported an operating loss of $19.4 million. For the six-month interim period ended Dec. 31, 2012, DHS reported operating income of $1.5 million (includes pro rata share of 2013 grant revenues of $15 million), for operating margin of 0.8% and operating EBITDA margin of 4.3%. Excluding the grant revenues, the interim period ended with operating loss of $12.6 million, ahead of the budgeted loss of $15.5 million.
Coverage of maximum annual debt service (MADS) by EBITDA was solid at 3.6 times (x) in fiscal 2012 and was 2.3x through the interim period. DHS' debt burden is manageable with MADS representing a moderate 2.1% of revenues. Liquidity, despite improving slightly over time, continues to be extremely weak; days cash on hand (DCOH) were at 39 days at fiscal 2012 year-end and were reported at 40.1 days for the interim period. Unrestricted cash to debt was 66.9% at Dec. 31, 2012.
Dimensions Health System had $357 million in total revenues for fiscal 2012. The system posts annual and interim financial statements on the '' website, which does not provide management analysis and commentary, but management analysis and commentary is provided to bondholders.
Additional information is available at ''. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated July 23, 2012.
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria