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TMCNet:  Fitch Revises Halifax Regional Med Center, NC's Outlook to Positive; Affirms Revs at 'BB'

[August 11, 2014]

Fitch Revises Halifax Regional Med Center, NC's Outlook to Positive; Affirms Revs at 'BB'

CHICAGO --(Business Wire)--

Fitch Ratings has affirmed the 'BB' rating on North Carolina Medical Care Commission bonds issued on behalf of Halifax Regional Medical Center (HRMC):

--$13.4 million series 1998.

The Rating Outlook is revised to Positive from Stable.

HRMC has an additional $6.5 million in direct placement bonds which Fitch does not rate.

SECURITY

The bonds are secured by a pledge of gross receipts, a negative mortgage lien, and a debt service reserve.

KEY RATING DRIVERS

RELATIONSHIP WITH NOVANT: The Outlook revision to positive reflects the benefits being realized from HRMC's new relationship with Novant Health (revs rated 'AA-'/Stable Outlook by Fitch). Following a one year management agreement effective March 2014, HRMC is in the midst of the due diligence phase of a likely merger with Novant Health. It is Fitch's expectation that this strategic partnership will continue to provide both operational and financial benefits to HRMC.

LOW DEBT BURDEN: HRMC's light debt burden allows for healthy debt service coverage at its rating level despite light operating cash flow. No additional debt is planned, and HRMC's capital reinvestment in recent years has allowed for a stable average age of plant equal to 11.8 years as of fiscal 2013.

STABLE BALANCE SHEET: HRMC's liquidity levels provide for some cushion against its operating performance, and related metrics are favorable for the rating category. In addition, consistent improvement in receivables is clear, with days in A/R falling to 44.8 in fiscal 2013, from 59.4 in fiscal 2009.

MIXED SERVICE AREA CHARACTERISTICS: While HRMC's long-standing position as a sole community hospital and market share leader is a significant credit strength, the service area's overall socioeconomic profile is generally unfavorable. HRMC is exposed to a high level of government/self-pay revenues, equal to 73% of its gross revenues in 2013.

RATING SENSITIVITIES

STABLE FINANCIAL PERFORMANCE: It is Fitch's expectation that HRMC will sustain its current financial profile over the near to medium term, supported by its relationship with a larger system. Upward rating pressure is likely should HRMC sustain current levels of performance over the next 12-24 months.

CREDIT PROFILE

HRMC is a 204 licensed-bed community medical center providing primary and secondary care services. The medical center is located in Roanoke Rapids, approximately 75 miles northeast of Raleigh. The system also includes approximately 60 physicians within a medical group and a foundation. In fiscal 2013 (Sept. 30 year-end) HRMC had $89.9 million in total operating revenue.

RELATIONSHIP WITH NOVANT

Following over a year of searching, HRMC has identified Novant Health as its partner. In December 2013, HRMC announced its intent to merge with Novant, following a one-year management agreement and du diligence period. Following department of justice approval, Fitch anticipates that HRMC will be folded into the Novant system sometime in late 2014 or early 2015.


Fitch views this management agreement and proposed merger positively, as it has begun to provide HRMC with strong system supports in management, strategic direction, and improved operating performance. Should the merger be executed as expected, it could provide HRMC with up to $35 million in capital commitment from Novant over five years.

For additional information on Novant Health, please see Fitch's report titled 'Novant Health, Inc., North Carolina' dated April 10, 2013.

PROFITABILITY SUFFICIENT FOR DEBT

Despite a light operating EBITDA of 4.3% at fiscal 2013, HRMC covered MADS by same at 1.8x in fiscal 2013. Fitch believes the management agreement executed in March with Novant has already begun producing operating benefits to HRMC, as evidenced by an improved operating EBITDA of 8.9% and coverage of 3.5x through the June 2014 interim period.

Offsetting this improvement is HRMC's ongoing reliance on approximately $5 million in Medicaid supplemental payments. This poses some concern, as the long-term viability of Medicaid reimbursement is uncertain beyond 2014. Additionally, HRMC has some difficulty retaining a consistent medical staff complement due to its rural location, which has led to some volume fluctuations impacting profitability.

Still, through June 30, 2014 HRMC produced a solid 3% operating margin, ahead of its breakeven budget. Capital expenditures are estimated near $4 million, or just above 100% of depreciation expense.

BALANCE SHEET STEADY

With $22.4 million in unrestricted cash at June 30, 2014 HRMC had 105.3 days of cash on hand (DCOH) and 115.1% cash to debt, both solid for the rating level. A light debt burden is evidenced by debt to capitalization of 38.4% at June 30 2014, which helps offset HRMC's light and sometimes variable cash flow.

Total debt equaled $19.5 million, which is 100% fixed rate. Approximately $6.5 million of that debt is directly placed with BB&T and has a seven-year term with options to renew. Per its indenture, HRMC covered maximum annual debt service (MADS) of approximately $1.7 million by 3.2x at June 30, 2014.

DISCLOSURE

Disclosure to Fitch has been adequate with quarterly disclosure, although only audited annual disclosure is required in the bond documents. HRMC provides disclosure upon request to other third parties. Fitch notes that quarterly disclosure includes a balance sheet and income statements; however, a statement of cash flows and management discussion and analysis is not provided.

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

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014).

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=849014

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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