CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BBB-' rating on the approximately $6.2 million outstanding Huron County Economic Development Corporation (MI) revenue bonds, series 2001*, issued on behalf of Scheurer Hospital (Scheurer).
*Underlying rating. The bonds are supported by a letter of credit (LOC) from Charter One Bank. Fitch was not asked to provide a rating based on the LOC support.
The Rating Outlook is Stable.
Debt payments are secured by a pledge of the gross revenues of the obligated group. In addition, a mortgage on various properties provides additional security for the bond issue.
KEY RATING DRIVERS
GOOD OPERATING PROFITABILITY: Scheurer has demonstrated consistent operating results, with a 3.4% and 10.9% operating and operating EBITDA margins, respectively, in fiscal 2011 (June 30 year-end). Scheurer is a designated critical access hospital (CAH), which provides enhanced Medicare reimbursement resulting in consistent operating profitability. In addition, profitability remains subject to supplemental provider tax revenue.
ADEQUATE LIQUIDITY: Days cash on hand is below the 'BBB' category medians, but the metric continued to improve in fiscal 2011 and cash to debt and cushion ratio are both adequate for the rating category.
SOLID DEBT SERVICE COVERAGE: Scheurer's debt burden is appropriate for its revenue base and the final payment on a five year bank loan was made in 2011, which lowered Scheurer's maximum annual debt service (MADS) to $770,000 from $1.3 million and further improved capital and liquidity ratios. However, Scheurer's debt portfolio is aggressive with 100% variable rate demand bonds (VRDBs), which subjects the hospital to inherent put, renewal, and remarketing risk.
SMALL REVENUE BASE: Scheurer's small revenue base of approximately $31.9 million (as of fiscal 2011) is a concern as minor operating disruptions could cause significant swings in financial performance.
Despite Scheurer's solid financial performance, upward rating movement is precluded due to its small revenue base, which makes it inherently susceptible to volatility in its medical staff, utilization trends and changes in reimbursement methodology, limiting its operational and financial flexibility. Currently, its CAH designation provides for cost plus Medicare reimbursement rates.
Scheurer's operating performance has been relatively stable over the last three fiscal years. In fiscal 2011, Scheurer posted a 3.4% operating margin and 10.9% operating EBITDA margin, both favorable to the 'BBB' medians of 1.7% and 8.5%, respectively. Operating income in fiscal 2011 was $1.1 million and included supplemental governmental funding in the form of disproportionate share payments ($340,000) and a net benefit from the provider fee program, which provides additional federal matching funds ($230,000). Fitch believes Scheurer is susceptible to any unfavorable changes in governmental reimbursement.
Scheurer is commencing an expansion and renovation of its acute care wing and its heating/cooling system, which is expected to cost about $3.4 million, including equipment, and will be paid out of cash flow. Despite closing 11 beds (out of 25 licensed beds) for the first phase of construction, Fitch expects minimal interruption of services because average occupancy is only eight inpatients. Therefore, profitability should remain at historical levels through the construction period.
Liquidity and capital related indicators are adequate for the rating level. Scheurer paid off a five-year bank loan on March 1, 2011, bringing MADS down to $770,000 from $1.3 million, positively affecting its debt and liquidity metrics. As of Dec. 31, 2011, Scheurer's unrestricted cash and investments equaled $9.1 million, translating to 114.2 days cash on hand, which is slightly below the 'BBB' category median of 128.6 days but improved from the prior year. Cushion ratio of 11.8 times (x) and cash to debt of 144.9% during the same time period are good and exceed the 'BBB' category medians of 8.8x and 79.8%, respectively. Scheurer also has approximately $2 million in trustee held funds required by the LOC provider (Charter One Bank), which is available to pay debt service.
Scheurer's debt portfolio is aggressive with 100% daily VRDBs supported by a LOC from Charter One Bank. The LOC commitment runs through Nov. 15, 2012. Management has indicated that they are currently working to secure the extension of the LOC. Under the reimbursement agreement, a draw on the LOC would need to be repaid before the expiration date. MADS coverage by EBITDA was healthy at 5x in fiscal 2011. Unrestricted cash and investments to puttable debt was 1.45x, providing some comfort. Scheurer also has a floating to fixed rate swap outstanding, which matures in November 2015. As of April 2012, the mark-to-market was negative $575,383 and there are no collateral posting requirements. Fitch does not expect Scheurer to issue additional debt in the near term.
The Stable Outlook is supported by Scheurer's stable financial performance and the expectation that CAH reimbursement will not materially change over the near term. No additional debt is expected.
Scheurer is located in Pigeon, Michigan, approximately 120 miles north of Detroit. The obligated group includes Scheurer, an acute care facility with 25 licensed beds and 19 long-term care beds; Scheurer Community Services, a senior living facility with 51 independent living units and 30 assisted living units; and Scheurer Healthcare Network, the parent corporation. Fitch considers Scheurer's disclosure practice to be poor. Fitch only receives financial information for the hospital and not the consolidated entity or the obligated group. Scheurer does not covenant to provide bondholders with annual or quarterly financial disclosure.
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.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 20, 2011;
--'Nonprofit Hospitals and Health Systems Rating Criteria', Aug. 12, 2011.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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KEYWORDS: United States North America Illinois Michigan New York
INDUSTRY KEYWORDS: Health Hospitals Professional Services Finance