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Fitch Affirms Valley Medical Center (WA) Revenue Bonds BBB+; Stable OutlookFitch Ratings has affirmed the 'BBB+' rating on the following revenue bonds: --$18.9 million Public Hospital District No. 1 of King County, Washington (Valley Medical Center) Hospital Facilities Revenue Bonds series 2010A (Tax-Exempt); --$61.2 million Public Hospital District No. 1 of King County, Washington (Valley Medical Center) Hospital Facilities Revenue Bonds series 2010B (Federally Taxable Build America Bonds (BABs). The Rating Outlook is Stable. SECURITY Debt payments are secured by a pledge of net revenues of Valley Medical Center (VMC), which exclude property tax revenue. In addition, there is a debt service reserve fund. KEY RATING DRIVERS IMPROVED CASH FLOW: VMC's operating profile was weakened in fiscal 2012 and 2013 (June 30 year end) due to heavy capital spending and investment in information technology (Epic). Operating cash flow improved in fiscal 2014 and through the nine months ended March 31, 2015 due to strong volume growth and containing expenses. VMC has significantly benefited from Medicaid expansion with an 18% growth in clinic visits through the interim period compared to the same prior year period. STRATEGIC ALLIANCE WITH UNIVERSITY OF WASHINGTON: VMC is a member of the University of Washington Medicine Health System (UW Medicine), which Fitch views favorably especially in the competitive and consolidating service area. VMC is part of any narrow/accountable care networks that UW Medicine forms and most notably, is part of the employer offered accountable care organization agreement with Boeing (News - Alert) that also includes other providers such as MultiCare (rated AA-) and Seattle Children's (rated AA). WEAK BALANCE SHEET: VMC's balance sheet has been impacted by the investment in Epic, which totaled $40 million, of which $27.5 million was expensed and contributed to weak cash flow in fiscal 2012 and 2013. VMC installed Epic in its clinics in July 2012 and in the hospital in October 2012. Liquidity metrics generally compare unfavorably to the BBB category medians. REBOUND IN TAX REVENUE: VMC has taxing ability as a district hospital and has issued the majority of its debt through limited tax general obligation bonds (LTGO). Due to statutory caps in the state, the amount of property tax levied had been reduced due to a decline in assessed property valuations and the tax revenue needed to cover its LTGO debt service had been insufficient since fiscal 2012. This has reverted beginning in calendar year 2015. STRONG DEBT METRICS ON (News - Alert) REVENUE BONDS ONLY: Debt metrics on a revenue bond only basis are strong with very good coverage levels at 5.4x in fiscal 2014 compared to 2.1x for all debt. RATING SENSITIVITIES SUSTAINING IMPROVED CASH FLOW: Fitch expects VMC to sustain the improved cash flow and rebuild its balance sheet. CREDIT PROFILE VMC is a public entity with taxing ability and comprises a 321 licensed bed hospital; eight primary care clinics in the South King County area; four urgent care clinics; several specialty clinics; and occupational and behavioral health clinics. VMC is a member of UW Medicine. In fiscal 2014, VMC had $471 million of total operating revenue. IMPROVED CASH FLOW After a period of weaker operating performance mainly due to the implementation of Epic, operating performance has rebounded in fiscal 2014, which was sustained through the nine months ended March 31, 2015. Operating margins (excluding property tax revenue and including interest expense on revenue bonds only) were negative 3.5%, negative 5.4%, negative 0.2% and 2.6% in fiscal 212, 2013, 2014 and through the nine months ended March 31, 2015, respectively. At the time of Fitch's last rating review in May 2014, improved cash flow was exhibited through nine months ended March 31, 2014, which has been sustained in line with our expectations. Performance through the nine months ended March 31, 2015 is ahead of budget with very strong volume growth due to Medicaid expansion, which has resulted in the demand to hire more physicians and increase the number of outpatient clinics it operates. Despite the strong growth, expenses have been held and operating expense per case mix adjusted admissions continues to trend down. The fiscal 2016 budget has not been finalized but management is targeting a 2% total margin based on the expectation that the strong volume growth since Medicaid expansion will subside. WEAK LIQUIDITY Unrestricted cash and investments have grown slightly due to improved cash flow after dropping to a low at fiscal year-end 2013. Unrestricted cash and investments were $177 million at March 31, 2015 compared to $129.8 million in fiscal 2013, translating to 138 days cash on hand, 57.1% (total debt) and 220.8% (revenue debt only) at March 31, 2015 compared to 108.9 days, 39.2% and 159.7%, respectively in fiscal 2013. Capital spending is expected to be about $35 million a year for the next few years, which should allow for continued improvement in liquidity if current cash flow is maintained. COMPETITIVE MARKET The service area is evolving as there has been significant consolidation activity and increasing competition. In addition, payer arrangements continue to be developed with various providers/payors aligning. However, Fitch views VMC's position as part of UW Medicine as a mitigant to the competitive threats. DEBT PROFILE VMC had $243.7 million of LTGO bonds and $80 million revenue bonds outstanding as of June 30, 2014. The debt portfolio is 100% fixed rate. Since 2012, VMC has had to backfill funds for LTGO debt service repayment as the amount of tax that was levied was subsequently statutorily reduced and insufficient to cover the LTGO debt service requirements. However, this will reverse beginning in calendar year 2015 due to improved assessed valuations and the amount of property tax levy is projected to be sufficient to cover LTGO debt service. Since there can be a shortfall in funds necessary to cover LTGO debt service, Fitch evaluates debt metrics on total debt as well as revenue bonds only. MADS on total debt outstanding is $26.4 million and MADS on revenue bonds only is $7.4 million (BABs at gross interest). MADS coverage by EBITDA on all debt was a weak 1.3x in fiscal 2013 but improved to 2.1x in fiscal 2014 and was 2.7x through the nine months ended March 31, 2015. MADS coverage by EBITDA for revenue bonds only was stronger at 2.3x in fiscal 2013, 5.4x in fiscal 2014 and 7.2x through the nine months ended March 31, 2015. Bond covenants require at least 1.25x MADS coverage on revenue bonds only. DISCLOSURE VMC covenants to provide annual disclosure within 150 days of fiscal year end and quarterly disclosure within 45 days of quarter end to the Municipal Rule Making Board's EMMA system. Additional information is available at 'www.fitchratings.com' Applicable Criteria and Related Research: --'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=984856 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 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. View source version on businesswire.com: http://www.businesswire.com/news/home/20150518006587/en/ |
