<0> Fitch Affirms Rex Healthcare's (NC) Revs at 'A+'; Outlook Stable </0>
<0> Fitch RatingsPrimary AnalystJim LeBuhn, +1-312 368-2059Senior DirectorFitch, Inc.70 West Madison StreetChicago, IL 60602orSecondary AnalystMichael Burger, +1-212-908-0555DirectororCommittee ChairpersonJeff Schaub, +1-212 908-0680Managing DirectororMedia Relations:Elizabeth Fogerty, New York, +1 212-908-0526Email: </0>
Fitch Ratings has affirmed the 'A+' rating on the following North Carolina Medical Care Commission Health Care Facilities revenue and revenue refunding bonds issued on behalf of Rex Healthcare (Rex):
--$119,845,000 series 2010A.
The Rating Outlook is Stable.
RATING RATIONALE
RELATIONSHIP WITH UNC HEALTH SYSTEM: Rex benefits from a strong relationship with the University of North Carolina Health Care System (UNCHCS). UNCHCS has a majority of seats on Rex's board, assists in the negotiation of managed care contracts, and approves operating and capital plans, among other things.
SOLID PROFITABILITY: Rex continues to generate operating and operating EBITDA margins that exceed Fitch's 'A' category medians. For the year ended June 30, 2012 (unaudited), Rex reported operating income of approximately $52.6 million (7.1% operating margin) and operating EBITDA totaling $84.5 million (11.4% op EBITDA margin), which are consistent with prior year performance and compare favorably against Fitch's respective 2011 'A' category medians of 2.6% and 9.4.%.
COMPETITIVE SERVICE AREA WITH GOOD DEMOGRAPHICS: Fitch views Rex's growing and affluent service area positively. However, it is highly competitive with primary competitors being Duke University Health System (revenue bonds rated 'AA' by Fitch) and WakeMed (revenue bonds rated 'AA-' by Fitch).
IMPROVED LIQUIDITY POSITION: Rex's strong EBITDA generation combined with relatively light capital spending has caused unrestricted cash and investments to more than double since fiscal year end 2009. At June 30, 2012, Rex had approximately $297.3 million of unrestricted cash and investments that equates to 170.5 days cash on hand, a cushion ratio of 23.6 times (x) and 200.7% cash to long-term debt.
POTENTIAL ADDITIONAL DEBT: Rex is considering issuance of approximately $80 million of new debt within the next 12-18 months to finance the development of a new Cancer Hospital. Furthermore, Rex has received Certificate of Need (CON) approval to construct a new Heart and Vascular Hospital which would likely include the issuance of additional debt.
SECURITY: Bonds are secured by a pledge of gross receipts and assets.
CREDIT SUMMARY:
The 'A+' rating reflects Rex's strong relationship with UNCHCS, strong operating profitability and debt service coverage, improved liquidity and good service area demographics. Credit concerns include Rex's competitive marketplace and the potential issuance of additional debt to fund the expansion of cancer and cardiac services.
Rex's primary credit strength continues to be its status as a controlled affiliate of UNCHCS, which is owned by the state of North Carolina. Since the merger between the two organizations in 2000, Rex continues to operate as a separate, not-for-profit entity and retains its separate identity. Additionally, Rex remains independently obligated on its debt. The most significant benefit of the affiliation has been UNCHCS' negotiation of Rex's managed care contracts and improved supply chain management through joint purchasing, which Fitch views favorably.
Rex's financial profile is characterized by strong operating profitability and light debt burden, resulting in robust debt service coverage and a sharp improvement in liquidity. In each of the last three fiscal years (2010-2012), Rex has generated operating margins no less than 6% and operating EBITDA margins of no less than 11.3%. In fiscal 2012 (unaudited), Rex generated income from operations of $52.6 million (7.1% operating margin) and operating EBITDA of $84.5 million (11.4% operating EBITDA margin) which exceed the respective 'A' category medians of 2.6% and 9.4%. On a consolidated basis, maximum annual debt service (MADS) is estimated at $12.6 million, which equates to a light 1.7% of fiscal 2012 revenues. Combined with Rex's strong profitability, MADS coverage by EBITDA is robust at 7.4x and 6.6x in fiscal 2012 and 2011, respectively. Coverage of MADS as per the Master trust Indenture for the obligated group in 2011 was an impressive 8.01x.
Rex's strong profitability and light capital spending has contributed to further growth in unrestricted cash and investment. At June 30, 2012 Rex's liquidity position improved to $297.3 million from $276.6 million at FYE 2011 Rex's days cash on hand of 170.5, cushion ratio of 23.6x and cash-to-debt of 200.7% compare favorably to 'A' category medians of 194.1 days cash on hand, 15.4x cushion ratio, and cash-to-debt of 113.8%.
The Wake County service area is very competitive. Duke University Health System operates 186 licensed-bed Duke Raleigh Hospital while WakeMed has two inpatient facilities, 515 licensed-bed WakeMed-Raleigh and 114 licensed-bed WakeMed-Cary. Within Wake County, Rex's market share of inpatient admissions in calendar 2011 was 30% compared to 43% for WakeMed and 6% for DUHS. However, clinical volumes and utilizations are solid reflecting the growing service area population service with above average wealth and education indicators.
Fitch's primary credit concern reflects the potential impact from the possible issuance of additional debt related to the construction of a new Cancer Hospital and a new Heart and Vascular Hospital. Rex has been awarded a CON for both projects. Development of the Cancer Hospital is expected to begin within the next 6-12 months with costs estimated at around $70 million with a portion of the project to be funded with debt. WakeMed has appealed the CON awarded on the Heart and Vascular Hospital. Thus, the timing as well as the final size and cost are undetermined at this time.
The Stable Outlook reflects Fitch's expectation that Rex can maintain historical performance. While Rex has sizable debt capacity at the current rating level, a change in the rating is precluded until the size, structure and timing of Rex's future capital plans become more defined.
Rex operates a 433-licensed-bed acute care tertiary hospital and two nursing care facilities with 227 beds. Rex is a controlled affiliate of UNCHCS, which operates a 799-bed academic medical center located in Chapel Hill, NC. In fiscal 2012 (unaudited), Rex had total revenues of approximately $742.9 million. Rex's outstanding debt is all fixed-rate with no outstanding interest-rate swaps. Rex covenants to submit annual and quarterly financial and utilization information to the MSRB's EMMA
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:
--'Nonprofit Hospitals and Health Systems Rating Criteria' (July 23, 2012);
--'Revenue Supported Rating Criteria' (June 12, 2012).
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria
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