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Fitch Downgrades Columbus Regional Health (GA) Revs to 'BB+'; Removes Watch; Outlook StableFitch Ratings has downgraded and removed the Rating Watch Negative on the following bonds issued by the Medical Center Hospital Authority on behalf of Columbus Regional Healthcare System (dba Columbus Regional Health, CRH): --$102.7 million series 2008, to 'BB+' from 'BBB'*; --$167.5 million series 2010, to 'BB+' from 'BBB'*. *The bonds are insured by Assured Guaranty, whose Insurer Financial Strength (IFS) is not rated by Fitch. The bonds have been assigned a Stable Rating Outlook. CRH also has an additional $23.8 million bank loan which is on parity with the outstanding bonds and not rated. SECURITY The bonds are secured by a pledge of net revenues, a funded debt service reserve for both the 2010 and 2008 bonds, and a leasehold agreement on certain obligated group property. KEY RATING DRIVERS EROSION IN PROFITABILITY: The downgrade to 'BB+' reflects the unexpected further deterioration in CRH's operating performance in fiscal 2014 (June 30 year-end). CRH booked a $46 million operating loss and thin 5% EBITDA margin for fiscal 2014, well behind budgeted expectations. Approximately $31 million in non-recurring items negatively impacted fiscal 2014 results, and operating losses have narrowed to $22 million (6.9% EBITDA margin) through the nine-month interim period ended March 31, 2015. COVENANT VIOLATIONS: The downgrade also reflects the occurrences of violations of various performance covenants under both its bond and bank documents in fiscal 2013 and 2014. CRH is unlikely to meet its coverage covenant in fiscal 2015 per the bond insurer and bank requirements, and has been in negotiations to secure the necessary waivers which Fitch believes is likely. PRESSURED LIQUIDITY: While currently steady year-over-year, CRH's balance sheet is likely to be pressured over the near term. CRH had approximately 138.6 days cash on hand (DCOH) and 53.1% cash to debt at March 31, 2015. Its debt profile is 93% fixed rate and its frozen pension plan is 91% funded. Liquidity is likely to be impacted by a qui tam settlement, and could be further pressured should the bank loan (due September 2016) not be renewed or refinanced. CRH has also been utilizing a line of credit for cash flow needs, with $8.4 million outstanding at March 31, 2015 compared to $18.4 million a year ago. STRONG MARKET POSITION: CRH's leading inpatient market share remains a credit strength, which improved to 65.8% in calendar year (CY) 2013 within its service area. Clinical volumes have remained at or above budget despite some volatility caused by the planned and executed relocation of acute care services of Doctor's Hospital in fiscal 2015, whose beds and license were merged with Midtown Medical Center. STRATEGIC IMPROVEMENTS ONGOING: CRH continues to implement its strategic initiatives which should generate further operating efficiencies across the system. At the outset of its strategic performance improvement plan, management identified nearly $30 million in achievable improvements which have begun to support better profitability. ELEVATED DEBT BURDEN: CRH maintains a sizeable debt burden, though current capital plans are not expected to require additional debt. CRH expects to spend $15 million in fiscal 2015 on routine capital, increasing that to $25 million annually to include certain projects at its Northside and Midtown campuses. RATING SENSITIVITIES POSSIBLE DEBT ACCELERATION: Per the master trust indenture, a failure to perform the required covenants in any related financing agreement after a cure period is an event of default, with the right to pursue acceleration as a remedy. Fitch believes the risk of debt acceleration is remote. CASH FLOW IMPROVEMENT: Over the longer term, the rating will be reliant upon CRH further narrowing its losses in fiscal 2015, and, absent non-recurring items, reach breakeven or better in fiscal 2016. Further rating pressure is possible should CRH's core operating profitability decline from current levels. CREDIT PROFILE CRH is a health care system with a total of 732 licensed beds and $411.6 million of operating revenues (fiscal 2014) located inColumbus, GA. The system includes 632-bed Midtown Medical Center, 100-bed Northside Medical Center, the John B. Amos cancer center, a foundation, a medical group, and other various subsidiaries and services. The obligated group represents 96.9% of total assets and 99.7% of total operating revenues. MISSED COVENANTS Fiscal 2014 results were hampered by $31 million in one-time items which resulted in operating losses well below the expected $8 million. CRH's EBITDA margin was thin at 5%, producing weak debt service coverage equal to 1.08x per CRH's indenture calculation. With a second year of missing the 1.5x insurance covenant, a $14.6 million springing debt service reserve fund was triggered which CRH funded in March 2015. Under the bank loan agreement, the failure to maintain at least a 'BBB' rating is an event of default. With CRH's downgrade to 'BB+', Compass (News - Alert) Bank has the right to pursue remedy and accelerate the $23.8 million bank loan. However, Fitch believes the possibility of acceleration to be remote. In April 2015, Compass renewed the bank loan through September 2016. RECURRING INCOME IS IMPROVED Fiscal 2014 included $31 million in one-time items, including a $25 million bad debt adjustment to reflect more accurate self-pay collection rates and $4.5 million legal costs associated with a qui tam lawsuit. Normalized operating performance absent these non-recurring items would have demonstrated some realized savings from CRH's ongoing strategic improvement program, producing nearer to 2x debt service coverage and a slimmer operating loss than in prior years. Fiscal 2015 results are expected to remain steady from interim results, which reflect 1.2x coverage by EBITDA and narrowed operating losses. Still, should a settlement be reached during fiscal year 2015, the associated legal costs and settlement amount could pressure those results. Court documents indicate the parties have reached an agreement in principle to settle, and the court stayed the case for 90 days for the parties to finalize the settlement. While a settlement would be favorable compared to an extended trial process, Fitch will monitor the outcome and may take rating action should the outlay be larger than anticipated. STRONG MARKET POSITION CRH maintains a solid market footprint, and is pursuing a strategy which should stabilize its position as the only provider in the service area for several services, including perinatal care, level III NICU, and level II trauma coverage. CRH maintains almost exclusive share for certain specialties, and its primary competitor, St. Francis (34.2% inpatient market share), won a CON award for OB/Gyn services. Effective Nov. 1, 2014, CRH merged the 219-bed Doctor's Hospital with Midtown Medical Center, absorbing the beds and license. With this consolidation of acute care services, the system should realize better clinical and operating efficiencies than the two adjacent facilities had prior, reducing duplicative and commingled staff and services. Over the longer term, CRH is expected to develop its Northside campus, which benefits from a service area with healthy demographic indicators and expands CRH's geographic reach. This should alleviate some of CRH's exposure to Medicaid, which is a high 20.9% of fiscal 2014 gross revenues. CRH received approximately $37 million in supplemental funding in fiscal 2014, including Medicare and Medicaid disproportionate share hospital (DSH) payments. These payments are expected to decrease, though CRH will likely remain eligible for Medicaid, uncompensated care and indigent care supplements going forward. DEBT PROFILE As of June 30, 2014 (FYE), CRH had $307.9 million in total debt, including all notes and capital leases. The $270.2 million in bonded debt is fixed rate, while the $23.8 million in bank notes are variable rate, with a Sept. 1 2016 renewal date. Maximum annual debt service (MADS) per the indenture and bank calculation is equal to $25 million, which includes approximately $4.5 million in notes payable and capital leases. CRH has a basis swap for a notional amount of $106.6 million, and there are no termination events related to the missed covenants under its various financing agreements. However, a downgrade below 'BBB-' is a termination event. CRH is required to post collateral against the fair value of the swap, and had $2.3 million in collateral posted as of March 31, 2015. DISCLOSURE CRH covenants to disclose annual (within 180 days of fiscal year end) and quarterly (within 50 days of quarter end) information to the Municipal Securities Rulemaking Board's EMMA system. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014); --'Revenue-Supported Rating Criteria' (June 16, 2014). Applicable Criteria and Related Research: U.S. Nonprofit Hospitals and Health Systems Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860 Revenue-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984455 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. |
