NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the rating on the following Industrial Development Authority of Arlington County, Virginia hospital revenue bonds issued on behalf of Virginia Hospital Center (VHC) at 'A+':
-- $138.8 million series 2010.
The Rating Outlook is Stable.
SECURITY:
Debt payments are secured by a pledge of the gross revenues of the VHC obligated group.
KEY RATING DRIVERS:
SOLID PROFITABILITY MAINTAINED: VHC continues to maintain very solid operating results that exceed those of many of its 'A' category peers. Based on robust utilization, due in part to the Kaiser Permanente (Kaiser) contract, which has now been extended to 2017, VHC produced operating EBITDA margins in 2010 and 2011 (unaudited) of 15.3% and 14.8%, respectively, well exceeding the 'A' category median of 9.4%.
EXCELLENT LIQUIDITY: Strong operating cash flow has enabled VHC to further strengthen its robust liquidity position. At 2011 year end, VHC reported unrestricted cash and investments of $421.6 million, equal to 514.65 days cash on hand (DCOH), 36.7 times (x) cushion ratio and cash equal to 313% of debt, all significantly higher than the category medians.
MODEST CAPITAL NEEDS: Despite the growth in inpatient and outpatient volumes, capacity has not been an issue. VHC has a new patient tower erected in 2004 and faces no significant capital needs other than routine capital investments in the near to medium term. Debt load is manageable with maximum annual debt service (MADS) equal to 3.2% of revenues, and MADS coverage by EBITDA and operating EBITDA in 2011 were very good at 5.3x and 4.6x, respectively.
COMPETITIVE SERVICE AREA: The Kaiser agreement has enabled VHC to increase its market share slightly, to 32%, but the area remains competitive with Inova as the market leader with twice VHS's market share.
WHAT COULD TRIGGER A RATING ACTION
A further strengthening of liquidity metrics combined with a preservation of strong operating profitability could lead to an upward movement in the rating.
CREDIT PROFILE:
SOLID PROFITABILITY MAINTAINED
VHC reported operating income of $21.7 million for the year ended Dec. 31, 2011 (unaudited), equal to an operating margin of 6.1% and operating EBITDA margin of 14.8%, both exceeding the 'A' category medians of 2.6% and 9.4%, respectively. The partnership agreement with Kaiser, which designates VHC as the hospital of choice for Kaiser subscribers, has been extended for an additional five years to 2017. Kaiser patients accounted for 18% of VHC's managed care revenues in 2011 and their census has significantly exceeded expectations with approximately 40 inpatients on any given day.
ROBUST UTILIZATION
Both inpatient and outpatient volumes have been robust in the two years since the signing of the Kaiser agreement in 2009. Admissions increased by 15.9% in 2010 and a further 7.6% in 2011, outpatient surgeries were 4.8% higher in 2011 and emergency department (ED) visits increased by 4.9% last year. The strong operating results reflect the boost from the Kaiser contract as well as management's focus on revenue cycle improvements and a reduction of average length of stay by half a day over the last two years.
EXCELLENT LIQUIDITY
VHC has maintained its strong liquidity position, supported by robust cash flow, with unrestricted cash and investments at 2011 year end of $421.7 million, equating to 514.5 DCOH, cushion ratio of 36.7x and 313% cash to debt These levels are significantly higher than the Fitch 'A' rated medians of 194.1 DCOH, 15.4 cushion ratio and 113.8% cash to debt. Following the 2009 move to a more conservative asset allocation, VHC's investment portfolio is now somewhat less prone to volatility.
MODEST CAPITAL NEEDS
All of VHC's medical, surgical and intensive care areas are in a patient tower constructed in 2004 and consequently the organization faces no major capital needs over the near to medium term. The capital budget for the current fiscal year is $27 million, roughly mirroring depreciation expense. Any additional capacity needed with the growing volumes can be accommodated using spaces in the old hospital facility, which are currently used for non-patient care. Fitch views the relatively light debt burden as a credit positive. MADS coverage by operating EBITDA of 4.6x is better than the category median of 3.3x, as is coverage by EBITDA of 5.3x as compared to the 3.7x 'A' category median. MADS as a percent of revenues is moderate at 3.2% and VHC now has all fixed-rate debt; the last payment on the series 2001 bonds was made in July of 2011.
COMPETITIVE ISSUES
VHC operates in a relatively competitive service area with Inova garnering approximately twice VHC's market share, but recent strong volumes have resulted in modest market share growth, with market share now exceeding 32%. A proposed construction of an HCA facility approximately 20 miles from VHC, to be completed in 2015, is not seen as a serious risk because of difficult traffic patterns in this area. Physician recruitment, given the attractiveness of the service area, has not been an issue for this organization in the past.
Virginia Hospital Center Arlington Health System (VHC) is a 342-bed tertiary hospital located in Arlington, VA, which is across the Potomac River from Washington DC. VHC generated total revenues of $359 million in unaudited fiscal 2011. VHC covenants to provide audited financial statements within 180 days of fiscal year end, and quarterly disclosure within 45 days of quarter's end. Disclosure is reported to the Municipal Security Rulemaking Board's EMMA system.
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', dated Aug. 12, 2011.
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=637130
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836
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Senior Director
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Secondary Analyst:
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Director
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James LeBuhn, +1-312-368-2059
Senior Director
KEYWORDS: United States North America New York Virginia
INDUSTRY KEYWORDS: Health Hospitals Professional Services Finance
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