<0> Fitch Affirms Southeast Missouri Hospital Association (MO) Revs at 'BBB+'; Outlook Stable </0>
Fitch RatingsPrimary AnalystEmily E. Wadhwani, +1-312-368-3347Associate DirectorFitch Ratings, Inc.70 W. Madison StreetChicago IL 60602orSecondary AnalystEva Thein, +1-212-908-0674Senior DirectororCommittee ChairpersonJames LeBuhn, +1-312-368-2059Senior DirectororMedia RelationsElizabeth Fogerty, +1-212-908-0526 (New York)
Fitch Ratings has affirmed the 'BBB+' rating on the following Cape Girardeau County Industrial Development Authority bonds issued on behalf of Southeast Missouri Hospital Association (SEMO, d/b/a SoutheastHEALTH):
--$5.5 million hospital revenue bonds, series 1993;
--$6.6 million hospital revenue bonds, series 2002;
--$93.9 million hospital revenue bonds, series 2007.
The Rating Outlook is Stable.
The bonds are secured by a pledge of the unrestricted receivables of Southeast Missouri Hospital Association, with additional security provided by a debt service reserve fund.
KEY RATING DRIVERS
IMPROVED OPERATIONS: Through 2012, SEMO produced 4.1% operating and 11.8% operating EBITDA margins, which were improved over prior years' levels. The improvement has been driven by some volume increases as well as a concerted effort at expense controls and operating efficiency. While interim results are affected by short-term issues at SEMO's regional entities, performance is expected to improve by fiscal year end (Dec. 31) 2013.
REGIONAL GROWTH STRATEGY: In 2012 and early 2013 SEMO executed operating agreements with three regional providers, which should provide top-line revenue growth, increase referral volumes, and allow SEMO to coordinate care across a wider region in southeast Missouri. Its primary service area population will increase to 253,000 people across nine counties, a 72% increase from the population served in prior years.
MANAGEABLE DEBT LEVEL: SEMO is planning to issue an additional $50 million in debt in fall 2013, which will be used to refinance existing debt ($21 million), reimburse for prior capital expenditures ($10 million) and provide $19 million in funds for capital projects. Pro forma debt metrics should remain well in line with Fitch's 'BBB' category medians, and SEMO's debt service requirements will not increase materially with this financing. SEMO covered pro forma maximum annual debt service (MADS) at 4.1x by operating EBITDA through the four-month interim period ended April 30, 2013.
CAPITAL PROJECTS: SEMO's routine capital budget remains modest following several years of sizeable spending. However, it is planning for $19 million in additional project spending in 2013 and 2014 to provide additional capacity in its emergency department (ED) and surgical space at its main campus. This project will be debt financed, which should allow for some balance sheet growth if cash flow remains healthy.
BALANCE SHEET STRENGTHENING: SEMO is pursuing a growth strategy and increasing its capital spending over the near term, which could limit meaningful growth in liquidity. Positive rating pressure may occur should SEMO meet its cash flow projections and continue building its balance sheet to levels more reflective of the 'A' rating category.
MAINTAIN PROFITABILITY: The rating affirmation reflects Fitch's expectation that SEMO will maintain improved cash flow results in the face of a growth strategy and capital project over the near term. SEMO expects stable results in 2013, which will require improvement over interim performance, but reflects several changes already underway which will improve revenues at the regional level and reduce supply expense.
Located in Cape Girardeau, MO (approximately 100 miles south of St. Louis), the SoutheastHEALTH (SEMO) system includes an acute care hospital with 230 staffed beds, three regional acute care facilities with a total of 94 staffed beds, home health, hospice, a new cancer center, and various other ambulatory sites and services across the Southeast Missouri region. In fiscal 2012, SEMO reported total revenues of $313 million.
The 'BBB+' rating affirmation reflects SEMO's sustained improvements in operating performance, as reflected in fiscal 2012 and expected 2013 results. SEMO produced a very healthy 4.1% operating margin in 2012, and is expecting to produce similar results in fiscal 2013. Interim results through April 30, 2013 are softer, at a 2.6% operating and 9.7% operating EBITDA margin. This will be bolstered by several impacts which will occur in the second half of the year, including the positive impact from implementing the 340(b) pharmacy program, increased collections at Southeast Health Center of Reynolds County (fka Advanced Healthcare Medical Center) in Reynolds County as bills are generated under its new CMS provider number, and the completion of a significant emergency department renovation at the Southeast Health Center of Ripley County (fka Ripley County Memorial Hospital) by July 2013.
In addition, fiscal 2013 and beyond should reflect revenue growth due to an expanded market with three additional facilities, several clinics, and more physicians around the region. During 2012 and early 2013, SEMO executed operating agreements with three regional hospitals with operations in Reynolds, Ripley, Stoddard, and Butler Counties. This strategy is expected to enable SEMO to garner additional tertiary referral volumes, and also better coordinate care and outcomes across a larger region of patients.
SEMO is also pursuing a low-cost strategy, which has meant a rigorous approach to improve operating efficiency and fostering good relationships with payors and patients on value. As evidence of this strategy, in 2012 SEMO produced revenue growth of 2.2% against a drop in total expenses of 1.4%, which reflects management efforts to reduce costs. Further, SEMO did not enact any charge increases from 2010-2013 and, in September 2012, SEMO evaluated its chargemaster and reduced its charges for certain imaging modalities by $54 million (gross)/$10 million (net).
Fitch believes this strategy will position SEMO well for the expected pressures of health reform, as it works with payors to reduce system waste, improve outcomes, and lower costs to consumers. SEMO recently entered into narrow network arrangements with two of its largest commercial payors, and also now serves as the preferred provider for Cape County's employees. As health reform is expected to pressure future governmental and supplemental reimbursement, SEMO's relationship with other payors and its ability to control its costs will have a clear impact on its financial performance.
During fiscal 2013, SEMO plans to issue approximately $50 million in direct placement debt, of which $11 million will be used to refinance existing bonds, $10 million to reimburse SEMO for prior capital expenditures, $10 million to refund its outstanding line of credit, and $19 million in new money for future capital projects. The debt will likely be variable rate, placed with two banks under staggered terms, and not rated. Pro forma MADS is estimated at $8.5 million, which is only slightly higher than current requirements. Pro forma debt outstanding will equal approximately $133 million, which will be 67% fixed rate.
Key capital projects include ED realignment at its main campus, adding a pediatric unit and observation unit to increase adult med/surg capacity within the emergency room. In addition, SEMO plans to expand its ambulatory support space to increase efficiencies and add capacity. These projects are expected to total $29 million, which will be funded via cash flow and the 2013 debt issuance. Otherwise, capital expenditures are expected to be modest, near $16 million in routine expenditures through 2014. Average age of plant of 8.0 through April 2013 is well below Fitch's 'BBB' category median of 10.5, indicating that SEMO has maintained its plant sufficiently over the past few years.
SEMO covenants to disclose annual audited financial statements within 120 days after the end of the fiscal year and quarterly financial and operating information within 90 days at the end of each quarter. SEMO disseminates this information including a balance sheet, income statement, cash flow statement and utilization statistics through the Municipal Securities Rulemaking Board EMMA website.
Additional information is available at ''
Applicable Criteria and Related Research:
'Revenue-Supported Rating Criteria', dated June 3, 2013.
'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria -- Effective Aug. 12, 2011 to July 23, 2012
Revenue-Supported Rating Criteria