<0> Fitch Rates St. Alexius Medical Center (ND) Series 2014A Revs 'BBB+'; Outlook Stable </0>
<0> Fitch RatingsPrimary AnalystAdam KatesDirector+1 312-368-3180Fitch Ratings, Inc.70 W. Madison StreetChicago, IL 60602orSecondary AnalystJames LeBuhnSenior Director+1 312-368-2059orCommittee ChairpersonEmily WongSenior Director+1 415-732-5620orMedia Relations, New YorkElizabeth Fogerty, +1 212-908-0526 </0>
Fitch Ratings has assigned a 'BBB+' rating to the following bonds expected to be issued on behalf of St. Alexius Medical Center (St. Alexius):
-- $48.9 million Burleigh County North Dakota health care revenue refunding bonds, series 2014A.
In addition, Fitch affirms the 'BBB+' rating on the following revenue bonds issued on behalf of St. Alexius:
--$39.8 million Burleigh County North Dakota health care revenue refunding bonds, series 2012A;
--$13.5 million City of Bismarck health care revenue bonds, series 1998A.*
*To be refunded from the proceeds of the series 2014A issue.
Additionally, Fitch withdraws the 'BBB+' rating on the series 2013A bonds. The bond issuance was cancelled subsequent to the rating assignment.
The series 2014A bonds are expected to be issued as fixed-rate bonds. Proceeds will be used to refund the outstanding series 1998A bonds, reimburse for prior capital expenditures, fund various capital projects and pay related costs of issuance. The series 2014A bonds are expected to price the week of June 16 through negotiation.
The Rating Outlook is Stable.
Bond payments are secured by the pledged revenues of the obligated group. A mortgage interest in the system's primary hospital facility is expected but is pending Vatican approval. Additionally, the series 2012A bonds have a springing debt service reserve fund.
KEY RATING DRIVERS
WEAK LIQUIDITY METRICS: Pro forma liquidity metrics are weak for the rating category with 85.2 days cash on hand, 7.6x cushion ratio and 65.9% cash to pro forma debt relative to Fitch's 'BBB' category medians of 144.7 days, 10.2x and 91.7%.
REBOUNDING PROFITABILITY: Operating profitability has been historically stable; consistently exceeding Fitch's 'BBB' category medians. However, operating margin deteriorated in fiscal 2013 to negative 0.4% as a result of a variety of factors. Operating margin improved to 3.6% in the nine-month interim period ending March 31, 2014 (the interim period) due to a combination of operational improvement initiatives and non-recurring items.
MODEST DEBT BURDEN: St. Alexius' pro forma debt burden remains modest with pro forma maximum annual debt service (MADS) equal to 2.9% of fiscal 2013 revenues. However, MADS coverage by EBITDA of 2.9x in fiscal 2013 is light relative to Fitch's 'BBB' category median of 3.1x. MADS coverage improved to 4.6x in the interim period reflecting the improved operating performance. Debt service is front-loaded and declines in 2019.
POSITIVE SERVICE AREA CHARACTERISTICS: Contrary to recent national trends, the North Dakota economy has benefited from increasing wages, low unemployment, and a growing population due to 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: St. Alexius' leading primary service area (PSA) market share increased to 50.4% in 2013 from 49% in 2010.
SUSTAINED IMPROVEMENT IN OPERATIONS: Fitch expects that St. Alexius will maintain solid operating cash flow levels, providing for solid MADS coverage to mitigate the risks associated with the system's weak liquidity metrics. Absent improvement in liquidity metrics, failure to maintain solid MADS coverage would likely result in negative rating pressure.
Headquartered in Bismarck, ND, St. Alexius operates a 306-licensed bed acute care hospital and two critical access hospitals, Garrison Memorial Hospital with 22 licensed beds and Turtle Lake Community Memorial Hospital with 25 licensed beds. Turtle Lake is operated through a lease agreement and is not part of the obligated group. Total consolidated operating revenues equaled $298.8 million in fiscal 2013. The obligated group accounted for 93.6% of consolidated operating revenue and 99.8% of consolidated total assets in fiscal 2013.
St. Alexius signed a letter of intent in February 2014 to explore an affiliation with Catholic Health Initiatives (CHI; revenue bonds rated 'A+' by Fitch) under which CHI would become the sole corporate member of St. Alexius. Fitch will assess the impact of any affiliation if a definitive agreement is executed.
WEAK LIQUIDITY METRICS
Unrestricted cash and investments increased to $65.6 million at March 31, 2014 from $51.4 million at fiscal year-end (FYE) 2010. However, liquidity metrics remain weak for the rating category and are a primary credit concern. At March 31, 2014, liquidity metrics equaled 85.2 days cash on hand, 7.6x pro forma cushion ratio, and 65.9% cash to pro forma debt, and are weak relative to Fitch's respective 'BBB' category medians of 144.7 days, 10.2x and 91.7%.
Capital spending is expected to decrease from an annual average of $26 million in fiscal 2010-2013 to roughly $15 million per year between fiscal 2014-2017. However, this does not include implementation of a new IT system, which is expected to total $65 million over approximately 10 years. The financing of this project is still being determined and the implementation is expected to begin in October 2015.
After four years of very stable operating profitability, with operating margins of 3.5% to 3.6% in each year between fiscal 2009 and 2012, operating profitability declined materially in fiscal 2013. Operating and operating EBITDA margins declined to negative 0.4% and positive 7.5%, respectively. The decline was primarily due to softer-than-expected outpatient volumes and surgeries, startup costs associated with the recruitment of new physicians, and higher bad debt related to growing self-pay volumes.
In response, management implemented an operational improvement plan which included supply chain savings, labor productivity and clinical process improvement initiatives. Through the nine-month interim period, operating and operating EBITDA margins rebounded to 3.6% and 11.5%, respectively. Interim operating profitability benefited from an approximately $2 million non-recurring decrease in supplies expense due to a reclassification of certain items to inventory on the balance sheet.
Management has budgeted for operating profitability to compress somewhat in fiscal 2015, with operating and operating EBITDA margins budgeted to equal 1.6% and 10.1%, respectively.
MODEST DEBT BURDEN
St. Alexius' pro forma leverage and debt burden remain modest and help to mitigate its weak liquidity metrics. Pro forma debt-to-capitalization of 36.6% at March 31, 2014 compares favorably to Fitch's 'BBB' category median of 48.9%. Pro forma MADS is estimated at $8.6 million, equating to 2.9% of fiscal 2013 revenues, and is light relative to Fitch's 'BBB' category median of 3.5%. Pro forma MADS coverage by EBITDA weakened to 2.9x in fiscal 2013 from 4.0x in fiscal 2012 and is light relative to Fitch's 'BBB' category median of 3.1x. However, MADS coverage by EBITDA improved to 4.6x in the interim period. Budgeted targets would provide solid MADS coverage of 3.8x in fiscal 2015.
Fitch views St. Alexius' service area characteristics 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 a growing population. Burleigh County's population increased 17.1% between 2000 and 2010 and the continued development of energy resources is expected to sustain the strong population growth in the service area. While the strong economy and growing service area population are long-term credit positives, they could lead to short-term challenges. Continued population growth could require issuance of additional debt to fund facility growth and could result in a sharp rise in uninsured or self-pay patients that could erode profitability.
LEADING MARKET SHARE
St. Alexius and its primary competitor, Sanford Bismarck, have historically maintained very stable market share positions. St. Alexius increased its leading market share in its PSA to 50.4% in 2013 from 49% in 2010 while Sanford Bismarck Hospital's market share decreased to 44.2% from 46.1%. MedCenter One was acquired by Sanford Health System in July 2012 and was renamed Sanford Bismarck Hospital. St. Alexius' market share has not been affected by the change in its competitor's ownership.
St. Alexius covenants to provide annual disclosure within 120 days of each FYE and quarterly disclosure within 45 days of end of the first three fiscal quarters and within 60 days of the end of the fourth quarter. Disclosure is provided through the Municipal Rule Making Board's EMMA system.
Additional information is available at ''.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 30, 2014.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria