|[August 14, 2014]
Fitch Upgrades Stanly Health Services (NC) Revs to 'A'; Outlook Revised to Stable
NEW YORK --(Business Wire)--
Fitch Ratings has upgraded to 'A' from 'BBB+' the rating on the
following health facilities revenue bonds issued by the North Carolina
Medical Care Commission on behalf of Stanly Memorial Hospital Project:
--$11,140,000 fixed rate bonds, series 1999;
--$6,705,000 fixed rate bonds, series 1996.
The Rating Outlook is revised to Stable from Positive.
The bonds are secured by a pledge of gross revenues, a negative pledge
of assets, and a debt service reserve fund.
KEY RATING DRIVERS
STRONG BALANCE SHEET: The upgrade to 'A' from 'BBB+' reflects, in part,
Stanly Health Services' (SHS) significant improvement in balance sheet
metrics over the last year. At June 30, 2014, growing unrestricted cash
and investments combined with a low and declining debt burden produced
balance sheet metrics favorable even at the 'A' rating. In addition, CHS
has pledged to provide $70 million in capital support as part of the
MERGER COMPLETE: The upgrade is further driven by completion of merger
with the Charlotte-Mecklenburg Hospital Authority (d/b/a Carolinas
HealthCare System, or CHS) on March 1, 2014. SHS will be fully
integrating into CHS' operating, financial and IT platforms over the
next two years under a Change of Control Agreement. SHS has already
benefitted from being part of CHS from operating under a management
services agreement since 2009, but management believes there remain
WEAK 2013 PROFITABILITY: SHS posted an operating loss in the fiscal year
ended Sept. 30, 2013, following several years of modest profitability.
Fiscal 2013 was heavily impacted by a spike in bad debt and lower
utilization, which continue to be driven by SHS' unfavorable payor mix
with over 60% in governmental payors and 13% in self-pay. However,
profitability showed signs of recovery through the 2014 interim period
with more vigilant expense control to manage lower revenues. Fitch also
believes the merger with CHS will bring further operational stability to
SHS in the medium to long term.
LOW DEBT BURDEN: With the exception of 2013, leverage metrics have been
historically consistent with the 'A' rating due to a light debt burden.
Coverage of maximum annual debt service (MADS) dipped to 2.8x in fiscal
2013 but rebounded 7.1x in the six month interim period ended June 30,
2014. Management also indicated that no new debt will be issued at the
INCREASED STABILITY EXPECTED: Fitch believes CHS' strong presence in the
Charlotte metro area, sound balance sheet, and large revenue base should
provide further operational stability for SHS beyond what is realized
from the management services agreement. Fitch's analysis assumes cash
and investments will remain at the SHS level and that the bonds will
remain outstanding with SHS as the sole obligor on the bonds. Any
material changes will be evaluated as information is publicly disclosed.
Stanly Health Services is located in Albemarle, NC. The obligated group
includes Stanly Regional Medical Center (109-bed acute care hospital),
Stanly Manor (100-bed long-term care facility), and Stanlex Inc. (home
health agency). Fitch's analysis is based on the consolidated entity,
which also includes the foundation, medical group, and Lifesmart Inc.
(case management). Total operating revenues were $130.3 million in
fiscal year ended Sept. 30, 2013.
Merger with Carolinas HealthCare System
CHS (revenue bonds not rated by Fitch) is a quaternary provider located
in harlotte and is the largest health system in North and South
Carolina. CHS had $4.6 billion in total system (primary enterprise)
operating revenues and $7.9 billion in total enterprise operating
revenues (both primary enterprise and managed facilities) in fiscal year
ended Dec. 31, 2013. Since 2009, CHS provided executive management as
well as financial oversight, supply-chain, physician practice,
information technology, quality and safety, and revenue cycle support
through a management services agreement.
On March 1, 2014, SHS completed its merger with CHS and is undergoing a
two year integration process with a Change of Control Agreement in
place. While the management services agreement has already allowed SHS
to benefit from the integrated relationship, Fitch believes the merger
will provide further operational and financial stability in the coming
years as SHS experiences the full impact of healthcare reform. Also, CHS
has pledged to invest approximately $70 million over 12 years in SHS as
part of the ownership transfer.
At June 30, 2014, unrestricted cash and investments totaled $60.7
million, up from $49.1 million one year prior. The growth in liquidity
was primarily driven by better collections and investment returns. Days
cash on hand of 183.7 is increased from 140.6 days one year prior, and
is consistent with the 'A' median of 199.2 days. Due to a low debt
burden, cushion ratio of 22.8x and cash to debt of 339.5% are
significantly stronger than the respective 'A' medians of 17x and
131.2%. Fitch expects liquidity levels to remain strong given recovering
cash flow and the capital support pledged from CHS.
Weak 2013 Profitability
Fiscal 2013 showed continued weakening in profitability primarily driven
by an increase in bad debt, which has risen from 9% of patient service
revenue in 2009 to 15% 2013. Patient service revenues also declined from
2012 to 2013 due to weaker volumes. As a result, Operating margin
dropped from 1.8% in 2012 to a negative 2.4% in 2013. Similarly,
operating EBITDA margin was 8.1% in 2012 and 4.5% in 2013 compared to
the 'A' median of 9.5%.
While the negative trends continued through 2014, profitability improved
due to effective performance management initiatives. In the six months
ended June 30, 2014, operating and operating EBITDA margins of 0.4% and
7.5% were considerably better than negative 0.8% and positive 6%,
respectively, in the prior year period. Management indicated SHS is on
target to meets its target operating EBITDA margin of 7.2% in fiscal
2014, which Fitch also believes is achievable.
Low Debt Burden
At June 30, 2014, SHS had $17.9 million in long-term bonds outstanding,
consisting of series 1999 and 1996 bonds. All debt is fixed and produces
level debt service of $2.6 million through 2016 and then drops down
below $2 million. MADS coverage dipped to 2.8x in fiscal 2013 due to
weak cash flows, but rebounded to 7.1x through the six month interim
period ended June 30, 2014. MADS as a percentage of revenue of 2% and
debt to capitalization of 20.8% in fiscal 2013 compares well against the
'A' medians of 3.1% and 36.3%. SHS is not party to any swaps.
SHS provides annual disclosure to the Municipal Securities Rulemaking
Board's EMMA System within 120 days of year-end, including balance
sheet, income statement and utilization statistics. Disclosure to Fitch
has been timely and thorough.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria', June 16, 2014;
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 30,
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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