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Fitch Places Great Plains Regional Medical Center (OK) Revs on Rating Watch NegativeFitch Ratings has placed the following Oklahoma Development Finance Authority bonds issued on behalf of Great Plains Regional Medical Center (GPRMC) which are currently rated 'BB', on Rating Watch Negative: --$33.7 million hospital revenue bonds, series 2007. SECURITY The bonds are secured by a pledge of the revenues of the obligated group and a debt service reserve fund. KEY RATING DRIVERS POTENTIAL RATE COVENANT VIOLATION: Through Dec. 31, 2015, GPRMC posted a $3.9 million net loss on total revenues of $20.6 million (negative 18.7% net margin). As a result, GPRMC debt service coverage by EBITDA was negative 0.6x coverage ratio through the six month interim period. The Rating Watch Negative reflects the potential for GPRMC to violate its debt service coverage requirement of 1.1x including triggering an Event of Default. EXCEPTIONALLY WEAK OPERATING PERFORMANCE: Through the six-month interim period ending Dec. 31, 2015, GPRMC $3.9 million loss from operations reflects a sharp drop in inpatient and outpatient volumes compared to the prior year period. Additionally, average length of stay increased from 3.6 days in year-to-date (YTD) to 3.9 days in the current period. SUFFICIENT BALANCE SHEET STRENGTH: GPMRC's balance sheet strength is currently sufficient at its 'BB' rating level. As of Dec. 31, 2015, GPRMC had 162.3 days cash on hand (DCOH), 6.8x cushion ratio, and 59.1% cash to debt which are all favorable to Fitch's below investment grade (BIG) medians. OIL DEPENDENT PRIMARY SERVICE AREA: GPRMC's primary service area (PSA) is highly dependent on the cyclical oil and gas industry. Recent pressures on the oil and gas industry have reduced drilling activity in the area and have resulted in a decline in the area population and increases in unemployment levels. RATING SENSITIVITIES RATE COVENANT VIOLATION: Failure to reverse its weak operating performance in the second half of 2016 would most likely result in Great Plains Regional Medical center (GPRMC) having coverage below 1.0x which would be an event of default under the master trust indenture (MTI (News - Alert)) and would result in downward rating pressure. LOOMING STATE MEDICAID CUTS: In light of recent budgetary pressures, the Oklahoma Health Care Authority announced a 25% cut in Medicaid provider payments which are expected to go into effect on June 1, 2016. These cuts could have negative ramifications on GPRMC's reimbursement rates and could further burden operating performance which could put negative pressure on the rating. MANAGEMENT ACTIONS COULD LEAD TO STABILIZATION: Despite the weak interim operating results, management has taken multiple actions in the second half of the fiscal year to help mitigate weak performance. Such actions include: instituting a new hospitalist group, reopening inpatient swing beds, and redirecting patients from Sayre Memorial Hospital which ceased operations on Feb. 1, 2016. These three actions, combined with any other mitigating management actions, could help reverse poor interim operating performance and lead to stabilization of the rating. CREDIT PROFILE GPMRC is a 62-licensed bed community hospital located in Elk City, Oklahoma, approximately 120 miles west of Oklahoma City. Total revenues were $45.8 million in fiscal year (FY) 2015. POTENTIAL RATE COVENANT VIOLATION AND HIGH LEVERAGE GPRMC remains highly levered, with a maximum annual debt service (MADS) of $2.9 million equating to a very high 7.1% of annualized fiscal 2016 revenues as compared to Fitch's BIG median of 4.4%. Coverage levels have been thin in recent years with MADS coverage by EBITDA of just 1.5x in FY 2015 and 1.4x in FY 2014. Due to weak operating performance, this coverage was further reuced in the interim period to negative 0.6x. A failure to finish the fiscal year with coverage of at least 1.0x would be an event of default under the MTI and would result in downward rating pressure. DECREASED VOLUMES WEAKENED OPERATION PERFORMANCE Inpatient admissions of 860 through Dec. 31, 2015 represent a 10.7% decrease from prior year period. Similarly, emergency room visits and outpatient surgeries were down 2% and 6.1% period over period. Furthermore, ALOS increased to 3.9 days at Dec. 31, 2015 from 3.6 days at Dec. 31, 2014. These declining volume levels have led to poor operating results at the end of the interim period. GPRMC's small revenue base makes it more vulnerable to medical staff and volume volatility, as evidence by current and historical performance. Management's ability to maintain a stable physician and nursing staff as well as maintain robust volume levels will remain key to the rating. Despite depressed volume levels and weak interim results, GPRMC's management team has made some changes in the second half of fiscal 2016 which should help improve operations. Management has replaced the entire hospitalist team, reopened inpatient swing beds, and has redirected some volumes from the recently closed Sayre Memorial Hospital. These actions should help improve operating performance, lower ALOS, and increase volume levels. NEGATIVE PSA/STATE PRESSURES GPRMC's PSA remains exposed to the cyclical oil and gas industry which has negatively impacted area demographics. Recent declines in prices of these commodities have resulted in reduced drilling activity which has led to a decreased population and increased unemployment rates. These weakened demographics could impact future acute volumes of GPRMC. Additionally, due to budgetary pressures, the Oklahoma Health Care Authority announced a 25% cut in Medicaid provider payments which are expected to go into effect on June 1, 2016. Should these cuts come to fruition, it could negatively impact GPRMC's reimbursement rates and further weaken its operating performance. SUFFICIENT BALANCE SHEET GPMRC's balance sheet remains adequate for its current rating level and helps provide some financial cushion against its weak operating performance. Through the six-month interim period, GPRMC had 162.3 DCOH, 6.8x cushion ratio, and 59.1% cash to debt which are all favorable when compared to Fitch's BIG medians of 85.9 DCOH, 5.7x, and 52.2%, respectively. GPMRC's cash position remains a key credit consideration. However, an inability to stem operating losses could deteriorate its liquidity which could put negative pressure on the rating. CONSERVATIVE DEBT PROFILE GPRMC has minimal financing risk, with a 100% fixed rate debt profile. No additional debt is planned and capital needs are expected to remain modest. GPRMC has only fixed rate debt and no derivative exposure. DISCLOSURE GPMRC covenants to disclosure annual and quarterly disclosure which it posts regularly to the Municipal Securities Rulemaking Board's EMMA System. Disclosure has been timely and thorough, with good access to management. Additional information is available at 'www.fitchratings.com'. Applicable Criteria Revenue-Supported Rating Criteria (pub. 16 Jun 2014) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012 U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807 Additional Disclosures Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003868 Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31 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. View source version on businesswire.com: http://www.businesswire.com/news/home/20160503007147/en/ |
