|[February 12, 2014]
Fitch Affirms Mountain States Health Alliance (TN) Revs at 'BBB+'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings affirms the 'BBB+' rating on the following Health and
Educational Facilities Board of the City of Johnson City, Tennessee,
bonds issued on behalf of Mountain States Health Alliance (MSHA):
--$55,000,000 hospital revenue bonds (Mountain States Health Alliance),
--$5,415,000 hospital revenue bonds, series 2009A;
hospital first mortgage revenue bonds, series 2006A;
hospital first mortgage revenue bonds, series 2001A;
hospital first mortgage revenue refunding bonds, series 2000A;
hospital first mortgage revenue bonds, series 2000C.
In addition, Fitch affirms the following parity debt issued on behalf of
--$5,400,000 Industrial Development Authority of Smyth County hospital
revenue bonds, series 2009B;
--$111,265,000 Industrial Development
Authority of Washington County Virginia, hospital revenue bonds, series
--$13,245,000 Mountain States Health Alliance taxable note,
The Rating Outlook is Stable.
Pledged assets and a mortgage on Johnson City Medical
Center and Sycamore Shoals Hospital. In addition, there is a debt
service reserve fund on certain series of debt.
KEY RATING DRIVERS
SOFTER FY2013 OPERATING PERFORMANCE: Net patient service revenue fell 2%
year over year, which led to a drop in MSHA's operating margin to 1.1%
from 1.7%. The weaker performance was driven by lower inpatient volumes
and a continued rise in observation days.
OPERATING CASH FLOW SUFFICIENT: In spite of the weaker operating margin,
MSHA's operating EBITDA margin remained steady at 13.2%, exceeding
Fitch's 'BBB' category median of 9.9%.
HIGH DEBT BURDEN: MSHA's high debt burden remains a key credit concern.
It pressures MSHA to maintain the strong cash flow levels in order to
support debt service that has historically been adequate for the rating
MARKET FOOTPRINT A CREDIT STRENGTH: MSHA is a 14-hospital system that
covers a 29 county service area and maintains a leading 53% market share
in its primary service area.
MIXED LIQUIDITY INDICATORS: Through the four-year historical period days
cash on hand (DCOH) has been solid at over 200 days; however, liquidity
metrics relative to debt (cushion ratio and cash to debt) are weaker
reflecting the elevated debt burden.
CAPITAL SPENDING SLOWING: After several years of heavy capital
investment, a moderation of capital spending is expected beginning in
fiscal 2014, which should provide MSHA with a measure of financial
THINNER OPERATING PERFORMANCE: MSHA has been challenged by lower
inpatient volume, which has eroded its operating margin. While first
quarter volumes are still down year over year, patient service revenue
is up along with inpatient surgery volumes. Additionally, MSHA continues
to aggressively manage expenses, but a further erosion of its operating
margin could lead to negative rating pressure.
REFORM INITIATIVES: MSHA has made material investments in positioning
the organization for health care reform. These initiatives include
starting up a health plan, forming a Medicare ACO, and increasing
physician engagement across the organization. A key for MSHA will be its
ability to realize a financial return on these strategies after the
initial investment for these initiatives.
Headquartered in Johnson City, Tennessee, MSHA was
formed in 1998 from the acquisition of five hospitals in Tennessee from
Columbia/HCA and has grown into a large regional health care system with
14 hospitals (1,623 licensed beds) and other related entities, primarily
serving northeast Tennessee and southwest Virginia. MSHA has a
membership interest (ranging from 50.1%-80%) in three of the hospitals
in the system (Smyth County Community Hospital, Norton Community
Hospital, Johnston Memorial Hospital). In fiscal 2013 (June 30 year
end), MSHA had total operating revenue of $1 billion.
At the end of calendar year 2013, MSHA's long serving CEO retired and a
new CEO started. Fitch views the transition as a credit neutral. The
retirement was planned in advance, providig MSHA ample time to
undertake a thorough search. The new CEO, whom Fitch met with, has
extensive industry background, including most recently managing a group
of hospitals at a for profit health care organization.
Softer FY13 Performance
From fiscal 2012 to fiscal 2013, MSHA's
operating margin fell to 1.1% from 1.7%. The drop in operating
performance was driven by a decline in inpatient volume coupled with a
rise in observation days, especially at its main tertiary hospital,
Johnson City Medical Center (JCMC). In fiscal 2013, JCMC's inpatient
volume declined 6.4% from the prior year (compared to a system decline
of 5%), while observation days, which are reimbursed at a lower rate
than inpatient days, increased 6.2% at both JCMC and across the system.
The lower inpatient volumes led to a year over year decline in net
patient service revenue, which declined 4.8% at JCMC (JCMC accounts for
approximately 51% of MSHA's patient service revenue) and 2% system wide.
Total operating revenue at MSHA did increase but was helped by an
additional $17 million of federal meaning full use funds in fiscal 2013.
As a result, in fiscal 2013, system operating income fell to $11.5
million from $16.9 million in fiscal 2012. MSHA is budgeting for an
operational improvement in fiscal 2014. To achieve this, MSHA has a
strategy to address observation stays through improved physician
documentation and physician education and is also implementing cost
reductions, including a recent layoff of 161 full-time equivalents. MSHA
continues to manage expenses through its LEAN practices as well.
First quarter performance is generally the weakest quarter and in the
first quarter of 2014, MSHA operating margin was negative 1.6%, an
improvement from a negative 2.6% in the first quarter of fiscal 2013. As
important, net patient service revenue grew year over year. Fitch
believes that MSHA will be able sustain the rate of operating
improvement through the rest of the fiscal year.
Also helping to mitigate the operating margin concerns is MSHA's
operating EBITDA, which has remained above category medians. In fiscal
2013, MSHA's operating EBITDA was 13.2%, and it was 11.1% in first
quarter 2014, both above the category median of 9%.
HIGH DEBT BURDEN/CAPITAL SPENDING ABATING
MSHA's debt burden is
elevated for the rating level and puts added pressure on MSHA to sustain
solid cash flow. Both maximum annual debt service (MADS) as a percent of
revenue at 7.6% and debt to EBITDA of 9.1x are significantly higher than
Fitch's' 'BBB' category medians of 3.5% and 3.8x, respectively. MADS
coverage by EBITDA in fiscal 2013 was an adequate 2.1x, compared to a
median of 3.1x.
However, MSHA is ending an extended period of intense capital
investment. Over the last six years, capital spending averaged
approximately 180% of depreciation relative to a median of 110.1%. Major
capital projects completed over this time include the building of three
replacement hospitals. Moving forward, Fitch expects MSHA's capital
spending to reduce to a more manageable level, closer to 100% of
depreciation. This should help ease MSHA's leveraged position and
provide a measure of financial flexibility as MSHA's works to improve
As of Sept. 30, 2013, MSHA had $606.3 million of
unrestricted cash and investments, equating to a solid 244.6 days cash
on hand, which compares favorably to Fitch's 'BBB' category median of
144.7 days. Cash-to-debt of 54.7% compared unfavorably to the 'BBB'
category median of 91.7% and also reflects MSHA's sizeable debt load.
Unrestricted cash and investments have grown approximately 14% since
fiscal year end 2012, when it was at $531.2 million.
Fitch continues to view MSHA's debt structure as
aggressive relative to its rating level, with a number of swaps and
approximately $425 million in variable rate debt. In the last year, MSHA
did restructure most of its variable rate debt to mitigate some of the
put, renewal, and remarketing risk. Prior to the restructuring, the vast
majority of MSHA's variable debt was supported by bank letters of credit
(LOCs), with the LOCs expiring on the same date for approximately $400
million of the debt.
Post-restructuring, MSHA directly placed about half of the variable rate
debt ($211 million) with three different banks, removing near-term put
and remarketing risk for that debt. MSHA also negotiated to stagger the
timing of the mandatory put dates for the private placements and the
expiration dates on the LOCs. These dates now range from three to 10
years, with a maximum amount of debt coming due on any single date at a
much more manageable level of $192 million. Fitch views these changes
MSHA's total outstanding long term debt is approximately $1.1 billion
with approximately 58% fixed rate and 42% variable. MSHA has
approximately $570 million in outstanding swaps, which are composed of
basis swaps and constant maturity basis swaps. Bank of America is the
counterparty for all of the swaps. The lack of counterparty diversity
exposes MSHA to a higher level of counterparty risk. As of November 30,
2013, the aggregate mark to market of the swaps was a negative $14.1
million. No collateral is currently being posted for the swaps.
MSHA covenants to provide annual and quarterly financial
and operational disclosure to EMMA.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
Hospitals and Health Systems Rating Criteria' (May 20, 2013).
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals
and Health Systems Rating Criteria
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