NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed its 'BB+' rating on the approximately $260 million Dormitory Authority of the State of New York, Orange Regional Medical Center Project, revenue bonds series 2008. The Rating Outlook is Stable.
RATING RATIONALE:
--The 'BB+' rating reflects Orange Regional Medical Center's (ORMC) high debt burden and weak balance sheet. Credit strengths include its leading market share position and improving profitability.
--ORMC is in the process of rebuilding a replacement hospital, which is on time and on budget, and is expected to be complete by April 2011.
--ORMC's profitability has improved over the last three years with solid operating margins of 3.6% for the nine months ended Sept. 30, 2010, 4.9% in fiscal 2009 and 3.3% in fiscal 2008 due to improved managed care contracting and increased volume.
--The balance sheet is weak relative to its debt load with only 26.7% cash to debt at Sept. 30, 2010; however, days cash on hand of 84.9 is in line with a below investment grade credit.
--Although the forecasted liquidity ratios from management's initial projections have not been met, further erosion is not expected since the remaining spend on the replacement facility will be funded from the series 2008 bond proceeds.
KEY RATING DRIVERS:
--Completion of the replacement hospital on time and within budget with a smooth transition to the new facility.
--Despite the strong operating performance for the rating category, upward movement of the rating is limited until ORMC's balance sheet significantly improves.
SECURITY:
Debt payments are secured by a gross receipts pledge and a mortgage pledge. Financial covenants include a 1.1 times (x) maximum annual debt service (MADS) coverage and 45 days cash on hand (prior to new hospital occupancy), which is expected for a below investment grade credit.
CREDIT SUMMARY:
The rating affirmation reflects Orange Regional Medical Center's leading market share position in its service area, a replacement hospital construction project that is on time and within budget, and sustained improved profitability. Offsetting credit factors include high debt burden and weak liquidity relative to its debt load.
ORMC has a leading market position in its primary and secondary service area of 36.4% for 2009, which has remained stable from 36.3% in 2007. The hospital with the next largest market share is St. Luke's Cornwall Hospital with 19.2% in 2009. ORMC's volume has continued to increase despite the economic environment due to successful physician recruitment, which has allowed it to add more services. ORMC also engaged Navigant to develop a physician integration strategy since a third of its admissions are from a large multispecialty group (Crystal Run) and the remaining admissions from physician practices of five physicians or less. Acute discharges were up 2.2% for the nine months ended Sept. 30, 2010 (interim period) compared to the prior year period.
The replacement hospital project financed with the series 2008 bonds remains on time and within budget and is almost complete and expected to be finished at the end of April 2011. The new facility will replace ORMC's operations at its two existing campuses - Arden Hill and Horton. Management has planned a 14 week transition period where the staff will be trained at the new facility with the move-in to the new facility occurring on one day in the summer of 2011. Management expects improved productivity with the move to the new facility. Fitch remains concerned about ORMC's ability to transition to the new facility without a significant disruption to its financial profile, which may result in one time increased expenses. The remaining series 2008 bond proceeds ($89 million) will fund the rest of the project cost with no additional equity contribution expected.
Profitability improvement has continued for the third year in a row with an operating gain of $8.9 million (3.6% operating margin) for the interim period compared to $16 million (4.9% operating margin) in fiscal 2009 and $9.9 million (3.3% operating margin) in fiscal 2008. The operational improvement has been driven by increased volume and strong managed care rate increases, which management expects will continue. Despite solid profitability, MADS coverage is adequate due to the high debt burden. MADS coverage was 1.1x for the interim period compared to 1.4x in fiscal 2009 and 1.2x in fiscal 2008. MADS comprises 6.1% of total revenue compared to the BBB rating category median of 3.5%.
Unrestricted cash and investments as of Sept. 30, 2010 were $69.5 million or 84.9 days operating expenses, which was stable from $67.9 million or 87 days operating expenses at fiscal year end 2009 and in line with below investment grade median ratios. Although the liquidity balances are below forecasted levels, they are adequate and should not place rating pressure on the 'BB+' rating unless its profitability deteriorates. Management's projections at the time of the series 2008 issuance was 132.1 days cash on hand for fiscal 2009 and 172.6 days for fiscal 2010. Fitch expects liquidity to remain stable to steadily improve since no additional equity contribution is expected for the project.
The Stable Outlook is based on Fitch's expectation that ORMC will complete its replacement facility on time and within budget. Upward movement of the rating is dependent on ORMC successfully operating in the new facility with limited impact to its financial profile in addition to significantly improving its liquidity position.
ORMC is a two-hospital system with a total of 450 licensed beds in Middletown and Goshen, NY, located about 65 miles northwest of New York City. Both hospitals will be replaced by a new 374-bed facility in 2011, which will be located in the town of Wallkill, NY, equidistant from the existing hospitals. Total revenue in fiscal 2009 was $323 million. ORMC covenants to provide annual audited information within 150 days of fiscal year end and unaudited quarterly statements within 45 days of quarter end for the first three quarters and within 60 days of the end of the fourth quarter.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;
'Nonprofit Hospitals and Health Systems Rating Criteria', dated 29 Dec 2009.
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=493186
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
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Senior Director
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Managing Director
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KEYWORDS: United States North America New York
INDUSTRY KEYWORDS: Health Hospitals Professional Services Finance
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