<0> Fitch Rates St. Alexius Medical Center (ND) Series 2013A Revs 'BBB+'; Outlook Stable </0>
<0> Fitch RatingsPrimary Analyst:Jim LeBuhn, +1 312-368-2059Senior DirectorFitch Ratings, Inc.70 West Madison StreetChicago, IL 60602orSecondary Analyst:Adam Kates, +1 312-368-3180DirectororCommittee Chairperson:Eva Thein, +1 212-908-0674Senior DirectororElizabeth Fogerty, +1 212-908-0526New York, Media Relations </0>
Fitch Ratings has assigned a 'BBB+' rating to the expected issuance of:
--$48.9 million Burleigh County North Dakota health care revenue refunding bonds, series 2013A (St. Alexius Medical Center Project).
In addition, Fitch removes from Rating Watch Negative and downgrades to 'BBB+' from 'A-' the ratings on the following revenue bonds issued on behalf of St. Alexius Medical Center (St. Alexius):
--$40.6 million Burleigh County North Dakota health care revs, series 2012A;
--$13.5 million City of Bismarck health care revs, series 1998A*;
*To be refunded from the proceeds of the series 2013A issue.
The series 2013A issue is expected to be structured as fixed-rate bonds. Proceeds will be used to refund the series 1998A bonds; to fund various capital expenditures over the next three years and pay related costs of issuance. The series 2013A bonds are expected to be priced the week of July 29 through negotiated sale.
The Rating Outlook is Stable.
The bonds are secured by the pledged revenues of St. Alexius.
KEY RATING DRIVERS
WEAKENED LIQUIDITY POSITION: The downgrade is driven, primarily, by the dilution in St. Alexius' balance sheet metrics resulting from the issuance of the series 2013 debt. At April 30, St Alexius had unrestricted cash and investments totaling $58.9 million compared to $68.4 million at fiscal year-end 2012. Including the impact of the draws on bank facilities related to clinics in Mandan and Minot, St. Alexius' pro forma days cash on hand, cushion and cash to debt ratios at April 30 were 87.5, 8.4x and 62.4%, respectively; each of which are weaker than the respective 'BBB' category median.
WEAKER INTERIM PROFITABILITY: The downgrade reflects Fitch's concern with the compression in St. Alexius operating profitability. From fiscal 2009-2011, St. Alexius has generated very stable and consistent operating and operating EBITDA margins which exceeded Fitch's 'BBB' category medians. However, profitability through the 10 month interim period has deteriorated with operating and operating EBITDA margins of 0.4% and 8.5%, respectively, due, in part, to rising uninsured costs, increased expenses related to physician recruitment and lower than expected clinical volumes.
MODEST LEVERAGE: St. Alexius benefits from a modest debt burden which allows for solid historical coverage of pro forma maximum annual debt service (MADS). Historical coverage of pro forma MADS in fiscal 2012 and through the 10 month interim period was 4.2x and 3.5x, respectively, compared to the 'BBB' category median of 2.8x.
POSITIVE SERVICE AREA DEMOGRAPHICS: Contrary to national trends, the North Dakota economy enjoys growing wages, low unemployment, and a growing population resulting from rising agricultural and energy prices. The development of the large oil and gas formation in the western part of the state is causing a sharp increase in population and business activity in St. Alexius' service area.
LEADING MARKET SHARE POSITION: St. Alexius has increased its leading market share position (50.1% vs. 44.2%) in its primary service area over its primary competitor, Sanford Bismarck Hospital (fka MedCenter One), which became part of Sanford Health System in June 2012. Historically, market share positions have been very stable and the two organizations have collaborated on certain shared services. Fitch will monitor if the ownership change alters the historical collaborative relationship.
IMPACTS OF POPULATION GROWTH: While the strong economy and growing service area population are seen as long-term positive credit factors, the need to issue additional debt to fund facilities expansion to meet a sharp growth in population would likely result in negative rating pressure given St. Alexius' historically low liquidity and recent decline in operating cash flow.
DETERIORATION IN FINANCIAL PROFILE: Sustained compression in margin generation from historical levels or a failure to improve liquidity over time could result in further rating pressure.
St. Alexius Medical Center includes the 306-licensed bed (281 staffed) St. Alexius Medical Center in Bismarck, North Dakota; 22-bed Garrison Memorial Hospital (Critical Access) in Garrison, ND (approximately 75 miles north of Bismarck) and 25-bed Community Memorial Hospital (Critical Access) in Turtle Lake, ND (approximately 61 miles north of Bismarck). On a consolidated basis, St. Alexius had total revenues of $285.3 million in fiscal 2012 (year ending June 30).
DETERIORATION IN LIQUIDITY INDICATORS
Fitch identified St. Alexius' weak liquidity metrics as a primary credit concern in its January 2012 rating action commentary. At April 30, 2013, St. Alexius' unrestricted cash and investments equaled $58.9 million compared to $68.4 million at fiscal year end (FYE) 2012 and $61.2 million FYE 2011. Including the effect of recent draws on bank loans, St. Alexius' pro forma cash and investments at April 30 totaled $66.9 million which equated to 87.5 days cash on hand, an 8.4x cushion ratio (based on MADS of $8.1 million) and cash to pro forma debt of 62.4%; all of which are weaker than the respective 'BBB' category medians of 138.2, 9.4x and 82.7%.
WEAKER INTERIM PROFITABILITY
Over the last four fiscal years (2009-2012), St. Alexius' has generated stable operating and operating EBITDA margins exceeding 'BBB' category medians. St. Alexius has generated operating margins of 3.5% or 3.6% in each year since 2009 while operating EBITDA margins have improved incrementally each year (from 9.6% in fiscal 2009 to 10.9% in fiscal 2012). However, profitability through the 10 months ended April 30 has deteriorated, with operating and operating EBITDA margins of 0.4% and 8.5%, respectively. Management attributes the weaker performance to softer-than-expected outpatient volumes and surgeries, investment in physician recruitment, and higher bad debt related to growing self-pay volumes. Management is implementing various initiatives which should generate improved operating performance for 2013.
While the series 2013 issue will increase St. Alexius' leverage position, debt burden remains modest which results in solid historical coverage of pro forma MADS. Pro forma debt-to-capitalization at April 30, 2013 is roughly 39.8%, which is an increase from 28.2% currently but still compares favorably to the 'BBB' category median of 49.1%. For purposes of analysis, Fitch is using pro forma MADS of $8.01 million which equates to a light 2.8% of fiscal 2012 total revenues. Historical coverage of pro forma MADS by EBITDA in 2011 and 2012 was a solid 3.7x and 4.2x, respectively, which exceeds the 'BBB' median of 2.8x. Through the 10 month interim period, coverage of pro forma MADS by EBITDA was 3.5x.
The ambulatory care center financing in Minot referenced in Fitch's prior rating action commentary (dated Jan. 10, 2012, available at ) ($25 million through non-obligated affiliate) is now on hold. Capital spending is estimated at $16 million in 2013 and $15 million in 2014. This excludes approximately $40 million of expenditures associated with the Epic implementation over the next two to three years, which will be funded via an operating lease structure.
Fitch views the service area demographics positively. The North Dakota economy has benefited from rising agricultural prices and the development of the large oil and gas formation in the western part of the state. The state enjoys low unemployment rates, strong wage growth, and growing population. From 2000-2010, the population in Burleigh County grew by 17.1% and the continued development of energy resources is expected to result in strong population growth in St. Alexius' service area. While the strong economy and growing service area population are seen as long-term positives, a sharp growth in population that requires issuance of additional debt to fund facilities or a sharp rise in uninsured or self-pay patients that erodes profitability does present some risk.
LEADING MARKET SHARE
Historically, St. Alexius and its primary competitor, Sanford Bismarck, have maintained very stable market share positions. St. Alexius increased its leading market share position in the primary service area in 2012 to 50.1% from 49% while Sanford Bismarck Hospital's market share decreased to 44.2% from 46.1%. In July 2012, MedCenter One was acquired by Sanford Health System and has been renamed Sanford Bismarck Hospital. Historically, both organizations have collaborated on certain shared services. However, the change in ownership presents some uncertainty regarding future collaborative efforts.
Under its Continuing Disclosure Agreement, St. Alexius has covenanted to provide annual and quarterly disclosure through the Municipal Rule Making Board's EMMA system. The content of St. Alexius' disclosure includes utilization statistics, balance sheet and income statement.
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.
For information on Build America Bonds, visit Fitch's website at ''.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria