|[December 23, 2013]
Fitch Affirms Methodist Hospitals' (IN) Revs at 'BBB'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the 'BBB' rating on the following Indiana
Health Facilities Financing Authority bonds, issued on behalf of The
Methodist Hospitals (TMH):
--$8.9 million revenue bonds, series 1996;
--$53.6 million revenue bonds, series 2001.
The Rating Outlook is Stable.
The bonds are secured by a pledge of gross revenues of the obligated
group, and a debt service reserve fund.
KEY RATING DRIVERS
HEALTHY LIQUIDITY: TMH continues to maintain robust liquidity metrics
for the rating category, demonstrated by 200 days of cash on hand (DCOH)
and 193.2% cash to debt at the interim period ended Sept. 30, 2013.
TMH's balance sheet metrics have consistently exceeded Fitch's 'BBB'
category medians of 144.7 DCOH and 91.7% since fiscal 2007. However,
increased capital needs and possible debt issuance will likely limit any
meaningful balance sheet growth going forward.
SOLID PROFITABILITY: TMH has produced solid operating profitability
since fiscal 2008, as evidenced by strong operating and operating EBITDA
margins of 5.1% and 12.8%, respectively, in 2012. Through the nine-month
interim period ended Sept. 30, 2013 TMH produced a 9.5% operating EBITDA
margin, which should improve following the receipt of an expected $11
million provider tax payment in December 2013. Still, Fitch expects
TMH's cash flow to moderate some as its Medicare DSH payments are
reduced going forward.
CAPITAL SPENDING PLANS: Following years of light capital spending
(average plant age is over 19 years), TMH is planning to increase its
capital reinvestment going forward. TMH is considering issuance of
additional debt to fund capital improvements in the first half of 2014.
Fitch will review any financing plans once finalized but believes TMH's
financial profile can absorb additional debt at the current rating level.
SUPPLEMENTAL REVENUE RISK LESSENED: A key credit concern has been the
contribution of disproportionate share hospital (DSH) program payments
to overall profitability (estimated at over $40 million in fiscal 2013).
With the extension of the Indiana provider tax program from June 30,
2013 to June 30, 2017 the risk of payment reduction has been
significantly reduced. Still, TMH's exposure to supplemental payments
will continue to present credit risk going forward as overall state and
government funding levels are reduced.
WHAT COULD TRIGGER A RATING ACTION
CAPITAL PLANS UNDERWAY: Upward movement in the rating is precluded until
the size and scope of the master facility plan is finalized. Fitch will
review TMH's capital plans including the impact of additional debt and
take appropriate rating action at that time.
TMH operates a 302-bed acute care facility in Gary (Northlake campus),
Indiana and a 313-bed acute care faility in Merrillville, Indiana
(Southlake campus), other various clinical entities, and a foundation.
Total reported revenues for 2012 were $330.4 million, which Fitch
adjusts to exclude investment income.
TMH covenants to disclose audited financial statements within 150 days
of fiscal year end. Annual disclosure is posted to the Municipal
Securities Rulemaking Board's EMMA system. While TMH does not covenant
to disclose quarterly statements, it does so voluntarily to bondholders
via EMMA. Quarterly disclosure includes balance sheet, income statement,
statement of cash flows, utilization, and management discussion and
analysis. Fitch notes that management has been very accessible, timely
and thorough in its disclosure.
SOLID FINANCIAL PROFILE
TMH maintains a solid balance sheet and a manageable debt burden,
reflected by steady coverage and leverage indicators. Through Sept 30,
2013 TMH produced a 9.5% operating EBITDA margin and 3.3x coverage by
same which excludes the expected receipt of an $11 million DSH payment
in the fourth quarter of 2013. Further, its cushion ratio of 17.4x well
exceeds that of Fitch's 'BBB' category median of 10.2x, and has
consistently improved since 14.4x in 2009. TMH will likely well exceed
its budget for 2013, which calls for $25 million in EBITDA, or a 7.9%
TMH remains reliant upon supplemental revenues via the state and federal
DSH program, which is subject to pressure under health reform. Fitch
notes that the provider tax program in Indiana was recently extended
through June 2017, which should preserve Medicaid DSH funding though the
medium term. However, Medicare DSH is expected to be reduced
significantly over the near term with an estimated reduction of $3.2
million for TMH in 2014. TMH expects to receive $43 million in Medicaid
and $11.9 million in Medicare DSH in 2013. Fitch believes TMH's
continued reliance on these supplemental funds will remain a credit
concern for the foreseeable future.
FUTURE CAPITAL PLANS
TMH is currently finalizing a master facility plan, which will likely
result in a debt financing for increased capital expenditures including
project-related spending. While Fitch believes TMH can accommodate
increased spending and debt at the current rating level, any upward
rating movement will depend upon review of finalized capital and
financing plans over the next six to 12 months. Fitch expects to review
these plans as they are finalized over the near term and will take any
necessary rating action.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', May 20, 2013.
Applicable Criteria and Related Research:
Not-for-Profit Hospitals and Health Systems Rating Criteria Outside the
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