|New York -
Fitch Ratings: As part of its ongoing surveillance review process, Fitch Ratings has affirmed the 'A-' rating on the following bonds issued by Marion County Hospital District, on behalf of Munroe Regional Health System (MRHS).
- $61.3 million series 2007.
The Rating Outlook is revised to Stable from Negative.
The Outlook revision to Stable reflects MRHS' improved profitability position over the past 18 months and reduced debt burden. Fiscal 2010's strong operating performance was aided by enhanced Medicaid payments related to rebasing of both prior period rate and current period enhanced Medicaid rates. Management utilized a portion of these funds to reduce its debt burden, which is viewed positively by Fitch. In addition, solid operating profitability has continued through the six months ended March 31, 2011.
- MRHS maintains the leading market position in its primary service area (PSA) of 61.2% in 2010, which is up from 60.3% in 2009. Fitch views MRHS' leading market share as a primary credit strength.
- At March 31, 2011, unrestricted cash and investments totaled $149.2 million translating into a very solid cash position with 196 days cash on hand, a 23.3 times (x) cushion ratio, and 170.3% cash to debt. These metrics compare favorably against Fitch's 'A' medians of 183.8 days, 21.2x, and 141.5%.
- MRHS has a challenging payor mix that consists of high Medicare (62%), Medicaid (12%), and self-pay (7%) patients. As Marion County's safety net provider, MRHS serves a majority of the area's indigent population, which is illustrated by a high and increasing bad debt expense of $52.5 million (14.1% of revenues).
- Over the next four fiscal years, MRHS expects to spend roughly $81 million on capital, which is increased from prior years. Fitch views the capital spending as necessary in order for the organization to maintain its leading market share in a competitive market environment.
KEY RATING DRIVERS:
- Stability at the current rating level is predicated upon MRHS' ability to maintain profitable operations consistent with its fiscal 2011 year to date performance.
- Maintain unrestricted cash levels that compare favorably against its low leverage position.
The bonds are secured by MRHS' gross revenues.
MRHS' primary business is the operation of a 421-bed acute care hospital in Ocala, Florida, which is located approximately 72 miles northwest of Orlando. MRHS leases the hospital from Marion County Hospital District, but does not receive any tax revenues to support operations. The lease term expires Sept. 30, 2013 and is subject to two consecutive 10 year terms unless either party cancels. Management expects the lease to be renewed automatically. In fiscal 2010, MRHS had $372 million in total revenues.
The 'A-' rating affirmation reflects MRHS' leading market position, improved profitability, solid balance sheet metrics, and reduced debt burden. MRHS maintains the leading market position in its PSA at 61.2%, which is improved since 2009 and represents the first market share increase by MRHS in the past four years. Management attributes the growth to the opening of three new operating rooms, continued successful physician recruitment, and improving local economy, which has supported utilization growth. MRHS' leading and improved market position is one factor that contributed to the organization's improved profitability position.
In fiscal 2010, MRHS generated a 4% operating margin and 9.2% operating EBITDA margin, which measured as MRHS' most profitable over the past four fiscal years. Specifically in 2010, MRHS received almost $15 million ($6.9 million related to prior periods) in enhanced Medicaid revenues, improved hospital throughput (reducing average length of stay), implemented revenue-cycle initiatives, and made productivity improvements that all positively contributed to MRHS' bottom-line. Management continues to control its expenses and improve revenue as MRHS is profitable through six-months 2011, recording 2.3% and 7.6% operating and operating EBITDA margins, respectively.
MRHS paid off a portion of its outstanding debt in fiscal 2011 ($8.9 million) with the enhanced Medicaid reimbursement monies received in 2010, which improved the organization's leverage position. At March 31, 2011, MRHS had maximum annual debt service (MADS) coverage by EBITDA and operating EBITDA of 5.4x and 4.1x, respectively, which compare favorably against Fitch's 'A' category medians of 3.3x. Further, MRHS' MADS decreased to $6.4 million from $9.2 million, representing 1.9% of total revenues, which Fitch considers low for the rating category. Additionally, MRHS has a strong balance sheet highlighted by a strong cash to debt position of 170.3% (as of March 2011).
Credit concerns include MRHS' historically challenged profitability position driven by its difficult payor mix, and competitive service area. Although profitable over the past 18-months, Fitch believes MRHS operating performance will remain challenged over the longer term resulting from its role as community provider for the area's large elderly and indigent population. This is evidenced through MRHS' payor mix which is primarily composed of governmental and self-pay payors (81% of MRHS' gross revenues). Although the Medicaid payment rebasing was positive, current proposals at the state level regarding the redesign of the Medicaid program could result in substantial payment reductions to MRHS going forward. Management is monitoring the potential impact to MRHS and expects to offset some of the cuts through continued operational efficiencies.
Further, MRHS operates in a competitive environment as its two main competitors are owned by HCA, Inc. (rated 'B+'; Stable Outlook by Fitch). Specifically, Ocala Regional Medical Center and West Marion Community Hospital have historically taken market share from MRHS and have recently employed the PSA's largest primary care physician group. Fitch believes the market will continue to remain competitive and MRHS is increasing its capital expenditures to enhance its competitive presence and secure its leading market position.
The Stable Rating Outlook is based on the ability for MRHS to maintain its profitable operations as exhibited through the first six months of fiscal 2011 and to manage any significant reductions in reimbursement. Although the rating is supported by a solid balance sheet and low leverage indicators, the inability to sustain profitable operations coupled with significant balance sheet deterioration may cause negative rating pressure.
As of March 31, 2011, MRHS had $87.6 million in outstanding debt, of which $61.3 million was fixed-rate. The series 2009 bonds ($25.4 million) were sold via a negotiated private placement to Regions Bank as the sole purchaser. Fitch does not rate the series 2009 bonds. Additionally, MRHS has three outstanding swaps that have a mark-to-market valuation of $407,000.
Disclosure: MRHS discloses annual and quarterly financial statements to the Municipal Securities Rulemaking Board's EMMA system.
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Additional information is available at Fitch.com
Applicable Criteria and Related Research:
- 'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;
- 'Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009.
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Applicable Criteria and Related Research:
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