CHICAGO--(BUSINESS WIRE)-- As part of its ongoing surveillance, Fitch Ratings has affirmed the following North Carolina Medical Care Commission bonds issued on behalf of Halifax Regional Medical Center (HRMC):
--$15.9 million hospital revenue bonds, series 1998 affirmed at 'BB+'.
The Rating Outlook is revised to Negative from Stable.
SECURITY
The bonds are secured by a pledge of gross receipts, a negative mortgage lien, and a debt service reserve.
KEY RATING DRIVERS
Adequate Liquidity Levels: HRMC maintained adequate liquidity levels for the rating category; however, future capital needs will likely limit growth over the near term.
Moderate Debt Burden: During fiscal year 2011 HRMC added $6.5 million to its debt portfolio to finance capital expenditures; however, its overall debt burden is manageable for the rating level.
Weakened Profitability: HRMC's operating performance has weakened through the 11-month interim period ended Aug. 31, 2011, due to declining utilization and a challenging payor mix.
Payor Mix Erosion: An ongoing credit concern is the continued shift in payor mix from commercial insurers to Medicaid and self-pay coupled with increasing levels of bad debt that have suppressed revenue growth.
Service Area Leadership: HRMC's position as a sole community hospital (SCH) remains a key credit strength as evidenced by its 66% market share within its service area.
WHAT COULD TRIGGER A RATING ACTION
Negative Volume Trends: Ongoing declines in HRMC's utilization levels which lead to flat to declining revenues would likely result in negative rating action.
Further Drop in Profitability: A decline in profitability below current levels, or balance sheet deterioration would result in further negative rating action.
CREDIT PROFILE
The Rating Outlook revision to Negative is driven primarily by demonstrable erosion in operating profitability, due in part to weak utilization trends and a challenging payor mix. Following strong fiscal 2010 performance, HRMC generated a negative 0.8% operating margin and 3.9% EBITDA margin through Aug. 31, 2011. While revenues are outpacing the prior year by 2.5%, expenses are also up 6.2% due in part to an increase of 3.8% in salary/wage expenses (largely from physician recruitment) and 17.8% increase in bad debt expense in 2011. Bad debt expense was a very high 19.9% of revenues through August 2011, ahead of 17.3% in fiscal 2010 and well ahead of Fitch's non-investment grade median of 8.7%. HRMC is budgeting for a return to positive operations in fiscal 2012 with a 1.0% operating margin, which Fitch believes could be challenging given the hospital's negative trends in volume and payor mix.
HRMC's payor mix remains a key credit concern, as it reflects high (and increasing) levels of Medicaid and self-pay. Through the interim period, Medicaid was a high 19.3% of gross revenues, ahead of 18.5% in fiscal 2010. Fitch notes that HRMC also receives Medicaid Disproportionate Share (DSH) payments, which are expected to decline to $1.31 million in fiscal 2011, following $2.21 million in fiscal 2010. As an SCH, HRMC also received $1.5 million in additional Medicare revenue in fiscal 2010. Fitch believes that as the future of the Medicaid DSH and SCH-related revenues is uncertain, this presents significant risk to HRMC's revenue base going forward.
Approximately $8.5 million in total capital expenditures is planned for fiscal 2012, including a $6.5 million expansion/renovation of HRMC's surgical space. HRMC took on a $6.5 million fixed-rate loan with BB&T to finance this project, with a seven-year term (ends in 2018) and 22-year amortization. The loan is on parity with HRMC's revenue bonds, and will be used to finance a 3,000 square foot renovation and expansion to its surgical suite, and expand related parking. Including the loan, total long-term debt is estimated at $20.8 million. At Aug. 31, 2011, debt to EBITDA was 5.0x and debt to capitalization was 40.6%, against Fitch's non-investment grade medians of 5.0x debt to EBITDA and 53% debt to capitalization.
HRMC's maximum annual debt service (MADS) coverage by EBITDA (estimated at $1.65 million including the bank loan) was 2.5 times (x) through the 11-month interim period ended Aug. 31, 2011, a significant drop from 4.9x in fiscal 2010. MADS was a manageable 1.5% of revenues in the interim period, slightly better than 1.6% in fiscal 2010. Still, Fitch notes that HRMC also had $1.4 million in operating lease expense in fiscal 2010, a sizeable expense when coupled with annual debt requirements.
HRMC's liquidity is adequate for the rating, providing for some flexibility against operational volatility. At Aug. 31, 2011 HRMC had $20.9 million in unrestricted cash, equating to 91.5 days of cash on hand (DCOH), a 12.6x cushion ratio and 100.6% cash to debt. While a decline from the 105 DCOH and 13.0x cushion ratio at fiscal year end 2010, HRMC's liquidity ratios remain sufficient for its rating level. However, given its inconsistent operating performance, any material deterioration in HRMC's liquidity would likely pressure the rating.
HRMC is a 204 licensed-bed community medical center (144 operated beds) providing primary and secondary care services. The medical center is located in Roanoke Rapids, approximately 75 miles northeast of Raleigh. In fiscal 2010, HRMC had $104.7 million in total operating revenue.
Disclosure to Fitch has been adequate with quarterly disclosure, although only audited annual disclosure is required in the bond documents. HRMC provides disclosure upon request to other third parties. Fitch notes that quarterly disclosure includes a balance sheet and income statements; however, a statement of cash flows and management discussion and analysis is not provided.
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 June 20, 2011.
'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
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KEYWORDS: United States North America New York North Carolina
INDUSTRY KEYWORDS: Health Hospitals Professional Services Finance
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