|[September 09, 2013]
Fitch Rates Mary Washington Healthcare, VA Bonds 'BBB+'; Outlook Negative
NEW YORK --(Business Wire)--
Fitch Ratings has assigned a 'BBB+' rating to the approximately $30
million series 2013A bonds expected to be issued by the Economic
Development Authority of the City of Fredericksburg, VA on behalf of
Mary Washington Healthcare (MWHC, or the system), f/k/a MediCorp Health
Fitch also affirms the following outstanding bonds at 'BBB+':
--$65.4 million Industrial Development Authority of the City of
Fredericksburg, VA hospital facilities revenue refunding bonds (MediCorp
Health System Obligated Group), series 2007;
--$125 million Industrial Development Authority of Stafford County, VA
revenue bonds (MediCorp Health System Obligated Group), series 2006;
--$65 million Industrial Development Authority of the City of
Fredericksburg, VA revenue bonds (MediCorp Health System Obligated
Group), series 2002B.
The Outlook is Negative.
The series 2013A bonds will be issued as tax exempt floating-rate bonds
without a liquidity facility. The system is currently evaluating various
terms for the initial period. Proceeds will be used to refund the
outstanding series 2011 bonds. A BB&T direct bank financing through
Economic Development Authority of City of Fredericksburg was not rated
by Fitch. A debt service reserve fund (DSRF) will not be funded for the
series 2013 bonds. The refunding will eliminate restrictive covenants
and security granted in connection with the BB&T direct bank loan.
Maximum annual debt service (MADS) of $22.1 million was provided by the
underwriters and occurs in 2014. The refunding is expected to generate
cash flow savings. The series 2013A bonds are expected to price the week
of Sept. 9, 2013.
The bonds are secured by gross revenues of the MWHC obligated group
which accounted for 84% of consolidated system revenues and 97% of the
system assets in fiscal 2012 (Dec. 31 year end).
KEY RATING DRIVERS
SIGNIFICANT BILLING ISSUES RESULT IN WRITE-OFF: The Negative Outlook
reflects the weakening of MWHC's financial profile. Fiscal 2012's large
operating loss was related to revenue cycle issues following a billing
conversion, and to a lesser degree expenses related to implementation of
computerized physician order entry (CPOE), with an aggregate negative
impact of $30.7 million. Management wrote off $25 million of net
receivables in 2012 and engaged Huron Consulting (Stockamp) in late 2012
to assist with revenue cycle improvements.
REVENUE PRESSURES: Fiscal 2012 was the first full year without the
benefit of sole community provider reimbursement for Mary Washington
Hospital (Mary Washington) and Medicare capital pass-through for
Stafford Hospital (Stafford), which totaled approximately $27 million
per year. The MWHC system 2013 budget includes a 5.5% growth in net
patient revenue versus a 3.9% decline in the prior year. The budget
includes an operating loss of $7.8 million and through the six months
ended June 30, 2013, operating performance was $0.5 million ahead of
budget ($3 million loss vs. budgeted $3.5 million loss).
LEADING MARKET SHARE: The system's market share has stabilized following
the 2010 opening of the HCA's Spotsylvania Hospital at the still
dominant 63% market share in the demographically favorable eight-county
primary services area (PSA) located approximately half way between
Richmond, VA and Washington, D.C., and Stafford Hospital census is
LIGHT LIQUIDITY: Liquidity remains light for the rating level with
unrestricted cash and investments at June 30, 2013 of $166 million,
equating to 108.2 days cash on hand (DCOH), cushion ratio of 7.5x and
cash equal to 57% of pro-forma long-term debt.
ELEVATED LEVERAGE: Coverage of MADS by EBITDA of 2.4x through the
interim period was slightly below the 'BBB' category median, but the
system has a conservative debt structure with close to 90% fixed-rate
debt and no swaps.
FAILURE TO MEET 2013 BUDGET: The failure to meet its fiscal 2013 budge
or a decline in liquidity would result in a downgrade.
MWHC is the parent of a group of health care-related organizations
including Mary Washington Hospital, a 442-licensed bed acute care
hospital located in Fredericksburg, VA, and Stafford Hospital Center, a
100-bed acute care hospital located in Stafford, VA. Revenues for the
system totaled approximately $569.5 million in 2012
LARGE 2012 OPERATING LOSS
Fitch's revision of the Outlook to Negative in June 2013 was based on
the large loss recorded by MWHC in fiscal 2012. The system ended fiscal
2012 with a large operating loss of $25 million, equal to a negative
operating margin of 4.4%, vastly missing its $3 million positive
operating income budget. Net patient revenue declined from the prior
year as fiscal 2012 was the first full year of operations incorporating
the loss of sole provider status for Mary Washington Hospital ($25
million) and the Medicare capital pass-through for Stafford Hospitals
($2.5 million). Management has been preparing for this reduction in
revenue based on their decision to open Stafford Hospital which
ultimately resulted in the loss in sole community provider revenue.
However, the major driver behind the poor performance in fiscal 2012 was
the conversion of the billing system in 2011, which had a $28 million
impact on profitability. The conversion, coupled with revenue cycle
management issues, led to difficulty with collections, resulting in a
large accounts receivable write-off of $25 million in fiscal 2012. An
additional factor was the expense related to the CPOE implementation.
Management calculated the aggregate impact of these issues to be $30.7
million. Lower-than-budgeted volumes during the year exacerbated the
Management engaged Huron (Stockamp) in late 2012 to reengineer billing
and assist with revenue recovery efforts. The target of the consulting
engagement is a $15 million-$22 million annual improvement in several
areas encompassing revenue cycle management, contracting, and clinical
documentation. Performance through the six months ended June 30, 2013
shows the system slightly ahead of budget with an operating loss of $3
million vs. the budgeted loss of $3.5 million. Management budgeted a
$7.8 million operating loss for fiscal 2013, which includes $11 million
of the $12 million Stockamp consulting fee as the revenue cycle
initiatives are being implemented, before a projected return to positive
operating performance by the following year.
LEADING MARKET SHARE
After initially losing some market share to the for-profit Spotsylvania
Hospital, which opened in 2010, market share stabilized in mid-2011 and
the system is maintaining its leading market share of 63% with Mary
Washington Hospital at 55% share and Stafford with 8%, vs. HCA's
Spotsylvania Hospital's 10%. Mary Washington is the only provider of
tertiary services in its market, including open-heart surgery. The only
outmigration is for some cancer, cardiac, high-end pediatrics and
high-end quaternary services, such as transplants. The system's service
area continues to exhibit strong economic and demographic
characteristics and the opening of Stafford has enabled the system to
benefit from the well-insured suburban growth to the north, which would
have gone to the system's competitors.
LIQUIDITY AND LEVERAGE METRICS LAGGING MEDIANS
Despite the 2012 loss, liquidity levels have not shown material
deterioration. The system reported unrestricted cash and investments of
$166 million at June 30, 2013, translating to 108.2 DCOH, cushion ratio
of 7.5x and 56.6% cash-to-debt, all lower than the respective category
medians of 144.7 days, 10.2 and 91.7%. Coverage by EBITDA was weak at
1.4x in fiscal 2012 for the consolidated system, but has improved to
2.4x through the interim period, though still lagging the category
median of 3.1x. MADS as percent of revenues is also slightly unfavorable
to Fitch's 3.5% 'BBB' rating category median, at 3.7% through June 2013.
The obligated group's coverage was higher at 1.6x in 2012, and was in
compliance with its required 1.15x rate covenant.
The system, however, was in violation of additional covenants (targeted
operating performance levels) entered into in connection with the $30
million 2011 direct bank financing with BB&T bank (not rated by Fitch).
MWHC negotiated a waiver with BB&T bank, which included an increase in
the interest rate to 78% of one-month LIBOR plus 200 basis points from
78% of LIBOR plus 175 basis points. The refunding of the series 2011
bonds will eliminate the restrictive covenants related to the series
2011. A mitigating factor to the system's slightly elevated leverage is
its conservative debt structure with close to 90% fixed-rate debt and
modest capital needs going forward. Planned capital investment is
focused on clinical integration and only minor renovations at Mary
Washington and is budgeted to mirror the system's depreciation expense
over the next several years.
MWHC covenants to provide audited annual financial statements and
quarterly disclosure to bondholders.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 20,
--'Fitch Affirms Mary Washington Healthcare, VA Bonds at 'BBB+'; Outlook
Revised to Negative, 28, June 2013
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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