CHICAGO--(BUSINESS WIRE)-- As part of its ongoing surveillance process, Fitch Ratings has affirmed the 'BBB+' rating on the following bonds issued on behalf of Owensboro Medical Health System:
--$460,645,000 City of Owensboro, Kentucky health system revenue bonds, series 2010A;
--$66,695,000 City of Owensboro, Kentucky health system revenue bonds, series 2010B.
The Rating Outlook is Stable.
SECURITY:
The bonds are secured by a pledge of gross revenues, mortgage lien, and debt service reserve fund.
RATING RATIONALE:
--Leading market position, as demonstrated by a 90.3% share within the primary service area.
--Strong operations, demonstrated by consistent profitability and metrics which compare favorably to Fitch's 'BBB' rated median measures.
--As expected, strained balance sheet metrics against a significant debt position.
--Designation as a Sole Community Hospital, which provides enhanced Medicare revenue.
KEY RATING DRIVERS:
--To maintain the current rating, it is imperative for Owensboro Medical Health System (OMHS) to sustain strong operating cash flow in order to grow into its high debt burden.
--Successful completion of the replacement hospital project on time and on budget.
CREDIT SUMMARY:
The affirmation at 'BBB+' reflects OMHS' substantial debt burden, which is tempered by solid operating profitability and a leading market share position. With approximately $515 million in long-term debt, OMHS is significantly leveraged. In fiscal 2010, OMHS generated 6.6 times (x) debt to EBITDA, 66.1% debt to capitalization, and maximum annual debt service (MADS) at 9.8% of revenue, against Fitch's 'BBB' rated median metrics of 4.5x debt to EBITDA, 50.1% debt to capitalization, and MADS at 3.5% of revenues. OMHS is currently undertaking a $385 million, 447-bed replacement facility, with an anticipated completion date of April 2013. Thus far, design and construction have been on time and on budget. As expected, planned equity contributions reduced OMHS' liquidity measures in fiscal 2010, to $199.1 million in unrestricted cash (222.6 days cash on hand [DCOH]). However, positive operating cash flow in excess of capital spending has improved liquidity slightly to $214.3 million (223.2 DCOH) as of Jan. 31, 2011, ahead of Fitch's 'BBB' rated median metric of 122.2 DCOH. Still, OMHS' cushion ratio of 5.5x and cash to debt of 42.2% as of Jan. 31, 2011 reflect a significant debt burden, and remain below Fitch's 'BBB' rated metrics of 8.5x cushion ratio and 75.9% cash to debt.
As offsetting factors, OMHS continues to maintain a very strong and consistent market position, generating a 90.3% market share in Daviess County in 2010, the primary service area, and has averaged above 90% market share for the previous four years. In addition, OMHS has consistently posted solid operating results, as demonstrated by an average operating margin of 3.8% from fiscal years 2005-2010. OMHS generated strong profitability into the eight-month interim period ending Jan. 31, 2011 of a strong 8.6% operating margin slightly behind the 9.6% operating margin generated in fiscal 2010. Coverage of MADS was 2.0x by EBITDA in fiscal 2010, improving slightly to 2.1x as of Jan. 31, 2011. Fitch expects that OMHS will continue to produce strong operating cash flow through the construction period, with an average operating EBITDA margin of 15.4% projected for fiscal years 2011-2016.
The Stable Outlook reflects Fitch's belief that OMHS' operating profitability will be sustained due to a leading market position and status as a sole community hospital and regional referral center, which provides for enhanced Medicare reimbursement, measuring approximately $10 million in fiscal 2010. While the long-term viability of this designation under health care reform is unknown, management expects some form of enhanced reimbursement to continue because of its rural setting.
OMHS is a 447-licensed-bed health system located in Owensboro, KY, approximately 100 miles southwest of Louisville, KY. Total revenues for fiscal 2010 were $416 million. OMHS covenants to provide annual audited disclosure no later than 180 days following fiscal year end and quarterly disclosure no later than 45 days after quarter end for the first three quarters, and no later than 60 days following the fourth quarter. Disclosure will be provided via the Municipal Securities Rulemaking Board's EMMA system.
This action was informed by information from the sources of information identified in the Revenue-Supported Rating Criteria.
Applicable Criteria and Related Research:
'Revenue-Supported Rating Criteria', dated 08 Oct 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:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
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CONTACT:
Fitch Ratings
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Emily E. Wadhwani, +1-312-368-3347
Associate Director
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Chicago, IL 60602
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Secondary Analyst
Jim LeBuhn, +1-312-368-2059
Senior Director
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Senior Director
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KEYWORDS: United States North America Illinois Kentucky New York
INDUSTRY KEYWORDS: Health Hospitals Professional Services Finance
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