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Fitch Affirms Mountain States Health Alliance (TN) Revs at 'BBB+'; Outlook StableNEW YORK --(Business Wire)-- Fitch Ratings affirms the 'BBB+' rating on the following Health and Educational Facilities Board of the City of Johnson City, Tennessee, bonds issued on behalf of Mountain States Health Alliance (MSHA):
--$55,000,000 hospital revenue bonds (Mountain States Health Alliance),
series 2012A; In addition, Fitch affirms the following parity debt issued on behalf of MSHA:
--$5,400,000 Industrial Development Authority of Smyth County hospital
revenue bonds, series 2009B; The Rating Outlook is Stable.
SECURITY KEY RATING DRIVERS SOFTER FY2013 OPERATING PERFORMANCE: Net patient service revenue fell 2% year over year, which led to a drop in MSHA's operating margin to 1.1% from 1.7%. The weaker performance was driven by lower inpatient volumes and a continued rise in observation days. OPERATING CASH FLOW SUFFICIENT: In spite of the weaker operating margin, MSHA's operating EBITDA margin remained steady at 13.2%, exceeding Fitch's 'BBB' category median of 9.9%. HIGH DEBT BURDEN: MSHA's high debt burden remains a key credit concern. It pressures MSHA to maintain the strong cash flow levels in order to support debt service that has historically been adequate for the rating level. MARKET FOOTPRINT A CREDIT STRENGTH: MSHA is a 14-hospital system that covers a 29 county service area and maintains a leading 53% market share in its primary service area. MIXED LIQUIDITY INDICATORS: Through the four-year historical period days cash on hand (DCOH) has been solid at over 200 days; however, liquidity metrics relative to debt (cushion ratio and cash to debt) are weaker reflecting the elevated debt burden. CAPITAL SPENDING SLOWING: After several years of heavy capital investment, a moderation of capital spending is expected beginning in fiscal 2014, which should provide MSHA with a measure of financial flexibility. RATING SENSITIVITIES THINNER OPERATING PERFORMANCE: MSHA has been challenged by lower inpatient volume, which has eroded its operating margin. While first quarter volumes are still down year over year, patient service revenue is up along with inpatient surgery volumes. Additionally, MSHA continues to aggressively manage expenses, but a further erosion of its operating margin could lead to negative rating pressure. REFORM INITIATIVES: MSHA has made material investments in positioning the organization for health care reform. These initiatives include starting up a health plan, forming a Medicare ACO, and increasing physician engagement across the organization. A key for MSHA will be its ability to realize a financial return on these strategies after the initial investment for these initiatives.
CREDIT PROFILE At the end of calendar year 2013, MSHA's long serving CEO retired and a new CEO started. Fitch views the transition as a credit neutral. The retirement was planned in advance, providig MSHA ample time to undertake a thorough search. The new CEO, whom Fitch met with, has extensive industry background, including most recently managing a group of hospitals at a for profit health care organization.
Softer FY13 Performance The lower inpatient volumes led to a year over year decline in net patient service revenue, which declined 4.8% at JCMC (JCMC accounts for approximately 51% of MSHA's patient service revenue) and 2% system wide. Total operating revenue at MSHA did increase but was helped by an additional $17 million of federal meaning full use funds in fiscal 2013. As a result, in fiscal 2013, system operating income fell to $11.5 million from $16.9 million in fiscal 2012. MSHA is budgeting for an operational improvement in fiscal 2014. To achieve this, MSHA has a strategy to address observation stays through improved physician documentation and physician education and is also implementing cost reductions, including a recent layoff of 161 full-time equivalents. MSHA continues to manage expenses through its LEAN practices as well. First quarter performance is generally the weakest quarter and in the first quarter of 2014, MSHA operating margin was negative 1.6%, an improvement from a negative 2.6% in the first quarter of fiscal 2013. As important, net patient service revenue grew year over year. Fitch believes that MSHA will be able sustain the rate of operating improvement through the rest of the fiscal year. Also helping to mitigate the operating margin concerns is MSHA's operating EBITDA, which has remained above category medians. In fiscal 2013, MSHA's operating EBITDA was 13.2%, and it was 11.1% in first quarter 2014, both above the category median of 9%.
HIGH DEBT BURDEN/CAPITAL SPENDING ABATING However, MSHA is ending an extended period of intense capital investment. Over the last six years, capital spending averaged approximately 180% of depreciation relative to a median of 110.1%. Major capital projects completed over this time include the building of three replacement hospitals. Moving forward, Fitch expects MSHA's capital spending to reduce to a more manageable level, closer to 100% of depreciation. This should help ease MSHA's leveraged position and provide a measure of financial flexibility as MSHA's works to improve operations.
ADEQUATE LIQUIDITY
DEBT STRUCTURE Post-restructuring, MSHA directly placed about half of the variable rate debt ($211 million) with three different banks, removing near-term put and remarketing risk for that debt. MSHA also negotiated to stagger the timing of the mandatory put dates for the private placements and the expiration dates on the LOCs. These dates now range from three to 10 years, with a maximum amount of debt coming due on any single date at a much more manageable level of $192 million. Fitch views these changes positively. MSHA's total outstanding long term debt is approximately $1.1 billion with approximately 58% fixed rate and 42% variable. MSHA has approximately $570 million in outstanding swaps, which are composed of basis swaps and constant maturity basis swaps. Bank of America is the counterparty for all of the swaps. The lack of counterparty diversity exposes MSHA to a higher level of counterparty risk. As of November 30, 2013, the aggregate mark to market of the swaps was a negative $14.1 million. No collateral is currently being posted for the swaps.
DISCLOSURE Additional information is available at 'www.fitchratings.com'.
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