CHICAGO--(BUSINESS WIRE)-- Fitch Ratings downgrades to 'BBB+' from 'A-' the following bonds issued on behalf of Nebraska Methodist Health System (NMHS):
--$42,500,000 Douglas County Hospital Authority No. 2 health facilities refunding revenue bonds series 2008;
--$167,600,000 Douglas County Hospital Authority No. 3 health facilities refunding revenue bonds series 2008;
--$8,380,000 Iowa Finance Authority (IA) health facilities refunding revenue bonds series 1997*.
* The series 1997 bonds are insured by MBIA Insurance Corporation, whose Insurer Financial Strength is not rated by Fitch.
The Rating Outlook is revised to Stable from Negative.
RATING RATIONALE:
--Weakened profitability due to lighter than anticipated patient volumes and increased expenses associated with the new Women's Hospital opened in June.
--Weak liquidity and debt metrics as compared to 'A' category medians that will be further diluted with a planned $30 million borrowing.
--Although the service area is very competitive, NMHS's market share has been relatively stable.
KEY RATING DRIVERS:
--Stabilized profitability, demonstrated by return to consistent positive operating margin over the next 18-24 months.
--Reduced capital needs and improved balance sheet metrics over the medium term.
SECURITY:
The bonds are secured by a pledge of gross revenues and a debt service reserve.
CREDIT SUMMARY:
The downgrade to 'BBB+' from 'A-' is supported by the higher-than-anticipated expense associated with bringing the new Women's Hospital on line in June of 2010, coupled with lower than anticipated patient volumes which has strained operating profitability through the nine-month interim period ending Sept 30, 2010. The downgrade is further supported by planned capital expenditures which Fitch expects will constrain liquidity growth and further stress liquidity metrics over the near term.
The new Women's Hospital began operations on June 21, 2010. Actual volumes at the new facility have lagged projections, which, combined with the increased costs generally experienced with opening a new facility, have pressured profitability through the interim period. For example, average daily census of 50 trails budgeted census of 66, reflecting the impact of the recession on women's services and births and has generated a $4 million negative variance to budget. System-wide NMHS generated a $3 million operating loss (-0.7% operating margin) through the nine-month period compared to $13 million of operating income (3.0% operating margin) in the year earlier period. Similarly, operating EBITDA margin in the interim period declined to 7.5% from 9.6% in the year earlier and is weak compared to the 'A' rated median of 10.0%.
Despite 61% growth in unrestricted cash and investments since fiscal year end 2008, NMHS's liquidity indicators are more consistent with Fitch's 'BBB' medians. At Sept. 30, Methodist reported $193.7 million in unrestricted cash and investments translating into 130 days cash on hand, a 10.3 times(x) cushion ratio and 76.4% of long-term debt, in line with the respective 'BBB' medians of 122, 8.5x and 75.9%. Furthermore, Fitch believes NMHS's planned capital spending will inhibit improvement in liquidity metrics over the near term. NMHS is budgeting up to $140 million in capital expenditures through 2014, primarily for renovations and expansions to the main campus (including routine capital spending), a portion of which is expected to be funded with the planned issuance of a $30 million bank qualified loan.
The Outlook revision to Stable reflects Fitch's expectation that profitability will improve as management backfills vacated space at the main campus with higher-margin clinical and surgical volume. Renovations are underway and recent physician recruitment should contribute improved performance. In the near term, management will be challenged to improve operating performance at the Women's Hospital. While future capital spending is expected to constrain improvement in liquidity metrics, successful completion of planned capital projects coupled with medical staff growth should allow NMHS to strategically bolster certain service lines, specifically oncology and surgery.
Nebraska Methodist Health System (NE) operates a 430-bed hospital in Omaha (NMH), a 236-bed hospital in Council Bluffs, Iowa (JEMH), and a newly-constructed 116-bed Women's Hospital in west Omaha. NMHS had total operating revenue of $584 million in 2009. NMHS provides annual audited financial statements and quarterly unaudited financial statements to the MSRB's EMMA system. Quarterly disclosure includes management discussion and analysis, utilization statistics, income statement, balance sheet, and statement of cash flows which is viewed positively.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from the Obligor, and Cain Brothers.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated 8 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:
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
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Senior Director
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Senior Director
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KEYWORDS: United States North America Illinois Nebraska New York
INDUSTRY KEYWORDS: Health Hospitals Professional Services Finance Managed Care
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