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TMCNet:  Fitch Downgrades Brooks Health System's (FL) Revs to 'A-'; Outlook Stable

[August 26, 2014]

Fitch Downgrades Brooks Health System's (FL) Revs to 'A-'; Outlook Stable

NEW YORK --(Business Wire)--

Fitch Ratings has downgraded to 'A-' from 'A' the rating on the following series of bonds issued by Jacksonville Health Facilities Authority (FL) on behalf of Brooks Health System (BHS):

--$91.7 million series 2007.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues of the obligated group and a mortgage on Brooks Rehabilitation Hospital.

KEY RATING DRIVERS

INCREASED DEBT BURDEN: The rating downgrade to 'A-' from 'A' reflects the increased debt burden since Fitch's last rating. Maximum annual debt service (MADS) of $14.5 million is up from the $9.4 million used in Fitch's last rating review and represents a very high 12.6% of 2013 total revenues. Despite strong EBITDA generation, historical coverage of MADS is light at 1.9x and 1.6x in 2013 and 2012, respectively. However, coverage of MADS by EBITDA through the six-month interim period ended June 30 was stronger at 2.8x.

ROBUST LIQUIDITY: A key credit strength supporting the 'A-' rating remains BHS's strong liquidity indicators. At June 30, unrestricted cash and investments of $296.3 million equated to 886.9 days cash on hand (DCOH), 20.5x cushion ratio, and 134.2% cash-to-debt, all of which exceeded Fitch's 'A' category medians by a large margin. BHS's draws on several lines of credit, totaling $37.2 million at June 30, 2014, were included in total long-term debt for Fitch's analysis.

LEADING MARKET POSITION: BHS has a dominant 95% market share of inpatient rehabilitation services in the North Florida and Southeast Georgia market, a large network of outpatient clinics, as well as post-acute services, including home health and skilled nursing facility (SNF). In addition, BHS is in the process of constructing a 111-bed SNF, as well as 10,000 square foot flagship outpatient facility.

MODEST REVENUE BASE: BHS's revenue base, although increased from $101.5 million in FY2010, remains small with $115 million in total revenue in FY2013, largely due to its specialized services in rehabilitation. Additionally, Medicare payments make up a large 54% of BHS's gross reimbursement, contributing to its modest revenues.

RATING SENSITIVITIES

MAINTENANCE OF CURRENT PROFILE: Fitch expects BHS to maintain its balance sheet strength and to produce operations that support stable debt service coverage.

CREDIT PROFILE

BHS is located in Jacksonville, Florida and consists of Brooks Rehabilitation Hospital (157 beds); Bartram Crossing, a 100-bed SNF; Bartram Lake, a 61-room assisted living facility with two memory units; multi-site outpatient centers; Brooks Health Development, Brooks Health Foundation, Brooks Home Care Advantage, a comprehensive home health service; and BH Holdings.

The 'A' rating is supported by BHS's strong liquidity metrics and its stable position as the dominant provider of rehabilitation services in the North Florida and Southeast Georgia market, which is further supported by its expanding role as a provider of a wide spectrum of post-acute care services. Fitch views BHS's liquidity as a major credit strength, which helps to offset a concentrated revenue base. Fitch's main credit concern is BHS's high debt burden with relatively weak coverage relative to Fitch's 'A' category median.

ELEVATED LEVERAGE POSITION

The further increase in debt since Fitch's last review combined with BHS's future expansion plans (which are likely to require additional borrowing) are the main driver of the downgrade. Fitch had previously expressed a concern regarding BHS's ability to take on additional debt without a negative impact on its rating. In 2013, BHS issued $35 million of bank-placed debt. Further, the corporation has approximately $37.2 drawn under a line of credit agreement. MADS of $14.5 million represents a very high 12.6% of 2013 revenues. Coverage of 1.9x in 2013 is weak relative to Fitch's 'A' category median of 3.8x. However, Fitch notes that coverage through the six-month interim period was a much improved 2.8x.BHS may use an additional $7 million draw on its line of credit by the end of the 2014 calendar year to finance the land acquisition and the cost of the outpatient center.


The 2013 private placement was a fixed rate, 20-year loan with a 2.4% interest rate. BHS has two other private-placement loans with variable-rate interest rates with par of $60.4 million. BHS's debt composition is 44% variable and 56% fixed rate. BHS has swaps on its outstanding series 2007, 2010 and 2011 long-term debt with a notional par of $152 million. The mark-to-market valuation at June 30, 2014 was a negative $4.7 million and there is no collateral posting requirement on the largest $91.7 million fixed- to variable-rate swap on the series 2007 bonds. The other variable- to fixed-rate swaps have collateral posting at $10 million; posting is currently not required.

STRONG LIQUIDITY POSITION

Fitch views BHS's liquidity position as a major credit strength. At June 30, 2014 (the interim period), BHS reported unrestricted cash and investments of $296.3 million, an increase of 40% from two years ago. BHS's liquidity at the 2014 interim period translated to a formidable 886.9 DCOH, 22.1x cushion ratio, and 155% cash-to-debt, all of which significantly exceed Fitch's respective 'A' category medians of 199.2 DCOH, 17x and 131.2%. BHS's investment allocation is somewhat aggressive, with 80% invested in equities, 10% in fixed income and 10% in alternative investments.

LEADING MARKET POSITION

BHS holds a leading market share of 95% of the inpatient rehabilitation admissions within a 60-mile radius around Jacksonville. Inpatient admissions increased every year over the last four years and were 4.6% higher year-over-year through the six-month interim period. BHS has faced very limited competition for rehab services in its market. An HCA-owned facility is planning to open a 20-bed rehab unit at one of its hospitals 20 miles from BHS, which is not likely to have a major impact on BHS volumes. BHS continues to see strong demand for its outpatient services through its operation of 28 clinics in a wide geographic area.

BHS is also implementing a strategy of being a provider of a comprehensive spectrum of post-acute services. Brooks Bartram Crossing, the 100-bed SNF, opened in July 2013 in a favorable location across the street from Baptist Medical Center South in Jacksonville and is connected to a new 61-bed assisted living facility on the same campus, which includes two 12-bed memory care units, the second of which will open shortly. BHS also operates a 40-bed rehab unit at Halifax Health (rated 'BBB', Negative Watch by Fitch) as a joint venture and operates a 35-bed SNF at St. Vincent's Southside Hospital, which is focused on the treatment of joint replacement.

BHS is also planning to construct a 111-bed SNF - University Crossing - next to the BHS main campus. The approximately $22 million cost of the facility will be funded with a portion of the proceeds of a $35 million private-placement loan which was issued in 2013. Construction is expected to be completed in the fall of 2015. University Crossing will have two specialty units - a 10-bed low-level brain injury unit and a 12-bed ventilation unit. Additionally, BHS will build a large, 10,000 square foot flagship outpatient facility in Orange (News - Alert) Park, which will include a neuro recovery unit. Completion of the $5 million facility is anticipated in the fall of 2015. BHS is also purchasing land in the Orange Park area for future development.

WEAK OPERATING RESULTS

Operating performance has historically been weak with operating losses fluctuating between $4 million in fiscal 2010 to $9.3 million in 2013. However, through the interim period ended, BHS recorded a $3.4 million operating profit, even though management still budgets for a smaller $2.4 million loss for FY2014 and projections call for positive operating results only in FY2016. BHS participates in a Medicare Bundled Payment Program for certain diagnoses and to date the experience has been positive, with net savings expected at approximately $2 million in this fiscal year.

DISCLOSURE

BHS has covenanted to provide quarterly disclosure within 45 days of each fiscal quarter-end and audited financial statements within 120 days of each fiscal year-end to the Municipal Securities Rulemaking Board's EMMA system.

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

Applicable Criteria and Related Research:

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria, May 30, 2014;

--'Revenue-Supported Rating Criteria, June 16, 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

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=858075

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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