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TMCNet:  Fitch Affirms Baptist Health Care Corp's (FL) Rev Bonds at 'BBB+'; Outlook Revised to Positive

[February 28, 2014]

Fitch Affirms Baptist Health Care Corp's (FL) Rev Bonds at 'BBB+'; Outlook Revised to Positive

NEW YORK --(Business Wire)--

Fitch Ratings has affirmed the 'BBB+' long-term rating on the following Baptist Health Care Corporation's (BHCC) outstanding debt:

--$148.8 million Escambia County, FL health facilities authority revenue bonds (Baptist Hospital Inc. Project), series 2010A.

The Rating Outlook has been revised to Positive from Stable.

SECURITY

Security interest in certain pledged revenues, mortgage pledge on Gulf Breeze Hospital, and debt service reserve fund.

KEY RATING DRIVERS

IMPROVED OPERATING PERFORMANCE: BHCC earned $26.8 million in operating income in fiscal 2013 (Sept. 30, 2013; audited), which is increased from 2012's $17.3 million profit. Management attributes the improved performance to $8.2 million of recorded meaningful use monies, volume growth in key service lines such as orthopedics and cardiology, and continued cost management. Specially, BHCC's operating margin and operating EBITDA margins of 3.9% and 9.5% compared favorably against Fitch's 'BBB' category medians of 1.8% and 9%, respectively.

LEADING MARKET POSITION: Despite operating in a competitive service area, BHCC controls the top market position in its primary service area (PSA; on an adult inpatient basis). Supported by specific service line volume growth through successful strategic physician alignment initiatives, BHCC's market share was nearly 36% through March 31, 2013, which demonstrates an improving trend from 34% in 2011. BHCC's next closest competitor is Sacred Heart Hospital (part of Ascension Health; revenue bonds rated 'AA+'; Stable Outlook by Fitch), which has an approximate 34.5% share.

ENHANCED LIQUIDITY POSITION: As of Dec. 31, 2013 (three months into fiscal 2014; unaudited), BHCC had an unrestricted cash and investments total of $231.3 million, which translated into 124.8 days cash on hand, 12.2x cushion ratio, and 98.1% cash-to-debt. These metrics have improved consistently since fiscal 2008. The unrestricted cash growth is supported by improving operations, better investment returns, muted capital spending, and revenue-cycle initiatives that have helped drive down accounts receivable.

MANAGEABLE CAPITAL PLANS: With all major construction completed, management intends to spend approximately $86 million on capital over the next three years, which Fitch views as manageable. BHCC has no plans for any significant additional debt over the medium term, which should contribute to further balance sheet growth.

EFFECTIVE MANAGEMENT PRACTICES: Despite some management turnover in 2013, Fitch views BHCC's management practices favorably, which are highlighted by growing the organization's market position and financial profile; maintaining an attractive physical plant, and producing top-tier quality care metrics.

RATING SENSITIVITIES

SUSTAINED OPERATING PERFORMANCE EXPECTED: Fitch expects BHCC to maintain solid operating performance as it continues to capitalize on its strategic investments. Positive rating movement may be warranted if BHCC can sustain its improved operating metrics relative to historical levels, which should also produce enhanced liquidity ratios and debt service coverage metrics.

BALANCE SHEET GROWTH: Fitch expects BHCC's balance sheet metrics to continue to improve as the organization does not have any planned sizeable capital expenditures. Although somewhat light for the 'BBB+' rating level, Fitch views the positive trend in unrestricted balance sheet resources favorably and believes with continued improvement upward rating pressure may be warranted.

CREDIT PROFILE

ORGANIZATIONAL OVERVIEW

BHCC operates Baptist Hospital, a 492-bed tertiary care hospital in Pensacola, FL; Gulf Breeze Hospital, a 77-bed acute care hospital in Gulf Breeze, FL; Atmore Community Hospital (49- licensed beds) and Jay Hospital (55-licensed beds) operating in certain counties in southern Alabama and northern Florida; and other health care related entities. Total operating revenue in fiscal 2013 was approximately $690 million. BHCC won the Malcolm Baldrige National Quality Award in 2003 and is an indicator of the organization's high quality and safety standards. BHCC covenants to provide annual audits within 150 days of fiscal year end and quarterly unaudited financials or the first three quarters within 45 days of quarter end.


RATING AFFIRMATION OF 'BBB+'

The 'BBB+' rating affirmation is supported by BHCC's solid operating performance, which helps produce good debt service coverage, leading market position and manageable capital plans over the medium term.

In fiscal 2013, BHCC generated $26.8 million in operating income, which was improved from fiscal 2012's $17.3 million, and translated into a 3.9% operating margin and 9.5% operating EBITDA margin (excludes $7.6 million from the sale of Baptist Leadership Group, which Fitch considers a one-time event). Overall, Fitch views BHCC's improved operating metrics favorably and as a primary credit strength. In fiscal 2014, management is budgeting for a 2.5% operating margin, which Fitch views as conservative as it excludes approximately $32 million of potential gains including $6.4 million in meaningful use monies and $9.2 in net gains from the sale of The Manor, among other things.

Continuing to support the improved operating performance are several initiatives such as growing the organization's employed physician base through strategic physician alignment, implementation of various expense reduction and revenue enhancement plans (including revenue cycle and supply chain management), and enhancing key service lines (cardiology and orthopedics) that have helped grow the organization since 2010. Specifically, Fitch views BHCC's relationship with the 'Andrews Institute' (a joint-venture ambulatory surgery center with world-renowned orthopedic surgeon Dr. James Andrews) favorably and has allowed the organization to grow its market position in orthopedics, but also contribute to the organization's financial improvement. This relationship dates back to 2006, and, since which time the orthopedic service-line profitability has nearly doubled to an approximate $21 million contribution margin (from $10 million). Orthopedics volume continues to be positive, which management expects will continue as the Andrews Institute has a regional and national draw.

Additionally, in July 2013 BHCC became a member of the Mayo Clinic Care Network (Mayo), which provides certain benefits such as co-branding and physician integration tools. Fitch views this relationship favorably as BHCC is the only Mayo affiliate in the Gulf Coast region, which extends approximately 150 miles.

KEY CREDIT CONCERNS

Fitch's key credit concerns include BHCC's somewhat light balance sheet for the rating level and competitive service area. In fiscal 2013, BHCC had 127.3 days cash on hand, 11.5x cushion ratio, and 92% cash-to-debt, which is relatively consistent with Fitch's respective 'BBB' category medians of 144.7 days, 10.2x, and 91.7%. Despite absolute unrestricted cash improvement since 2008 Fitch still views BHCC's balance sheet strength as a primary credit concern. Fitch expects further balance growth for positive rating movement to occur.

BHCC operates in a highly competitive service area, which is split among three main providers. BHCC is the market leader; however, Sacred Heart Hospital maintains a very close second position of 34.5%, while West Florida (part of HCA) has a 23.3% share. Fitch believes it is essential for BHCC to continue its strategic alignment initiatives with physicians in the service area to maintain its leading market position. Additionally, Fitch believes it is imperative for BHCC to continually invest in its physical plant to maintain competitiveness.

DEBT PROFILE

As of Sept. 30, 2013, total outstanding debt was approximately $238 million and includes $182 million of bonded debt, $35 million of notes payable, and $21 million of capital leases and other debt. Fitch used a maximum annual debt service (MADS) of $19 million, which incorporates all debt (assumes full amount drawn under capital lease) and treats balloon indebtedness in accordance with BHCC's master trust indenture. The debt portfolio is 74% fixed rate and 26% variable rate, which Fitch views as relatively conservative.

BHCC has three outstanding swaps for a total notional amount of $65.3 million and includes a basis swap with Citi for $40 million and two floating- to fixed-rate swaps with Bank of America for $25.3 million. BHCC is required to post collateral at its current rating level if the mark to market exceeds $3.25 million per counterparty. To date, there have been no collateral postings.

MADS coverage by EBITDA was 4x and operating EBITDA was 3.4x, in fiscal 2013, which exceeded Fitch's 'BBB' category medians of 3.1x and 2.7x, respectively. BHCC's debt service coverage levels are improved from fiscal 2012's 2.9x and 2.8x. Overall, Fitch views the debt service coverage improvement favorably and continued output of solid coverage levels may lead to positive rating pressure over the next 12-24 months.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

'Revenue-Supported Rating Criteria', dated June 3, 2013

'Nonprofit Hospitals and HealthSystems Rating Criteria', dated May 20, 2013

Applicable Criteria and Related Research:

2014 Outlook: U.S. Nonprofit Hospitals and Healthcare Systems

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726237

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822123

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.


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