TMCnet News

Fitch Affirms Frederick Memorial Hospital (MD) Revs at 'BBB+'; Outlook Stable
[September 22, 2014]

Fitch Affirms Frederick Memorial Hospital (MD) Revs at 'BBB+'; Outlook Stable


NEW YORK --(Business Wire)--

Fitch Ratings has affirmed the 'BBB+' rating on approximately $99 million of series 2012A Maryland Health and Higher Educational Facilities Authority revenue bonds issued on behalf of Frederick Memorial Hospital (FMH).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross receipts and mortgage.

KEY RATING DRIVERS

ONE-TIME OPERATING LOSSES: The 'BBB+' rating is affirmed despite weakened operating profitability in fiscal 2014 (ended June 30 2014; draft audit) since many of the items were non-recurring. FMH posted a negative 1.4% operating margin ($4.9 million loss) in fiscal 2014, significantly down from positive 0.4% in 2013 and below Fitch's 'BBB' category median of 1.1%. Management attributes losses to a spike in depreciation, infrastructure reorganization costs under the Maryland Global Budget Revenue (GBR) program, and physician group losses. However, operating EBITDA margin remained stable at 7.4% compared to 7.8% in 2013.

CHANGING OPERATING ENVIRONMENT: FMH has been operating under Maryland's GBR program effective July 1, 2013. Under the new program, FMH will receive fixed annual revenues on its regulated service lines, which should provide operational and financial stability in a declining volume environment.

GROWING LIQUIDITY: FMH's $166 million in unrestricted cash and investments at June 30, 2014 equated to 186 days cash on hand (DCOH), a 11.9x cushion ratio, and 96% cash to debt, all of which have improved from 135 days, 7.3x and 73%, respectively, in fiscal 2010. FMH's current liquidity metrics exceed Fitch's 'BBB' category medians and provide some cushion against temporary operating volatility.

HIGH DEBT BURDEN: At June 30, 2014, long-term debt of $172 million is relatively high with maximum annual debt service (MADS) at 4% of revenues compared to the median of 3.6%. While, MADS coverage of 2.1x is weak compared to Fitch's median of 2.6x, Fitch expects coverage to remain relatively stable given the predictability of revenue under the GBR program.

DOMINANT MARKET POSITION: FMH holds a dominant market share of 71% in its primary service area (PSA), which Fitch considers a primary credit strength. The largest competitor has less than 5% market share in the PSA.

RATING SENSITIVITIES

REVERSAL OF NEGATIVE OPERATING TREND: Fitch expects FMH's profitability to recover and for FMH to meet its budget for fiscal 2015. Inability to meet targeted performance may lead to negative rating pressure.

CREDIT PROFILE

Located in Frederick, Maryland, FMH is a 309 staffed bed acute care hospital. In fiscal 2014 (June 30; draft audit), FMH had total operating revenues of $347 million.

ONE-TIME OPERATING LOSSES

FMH's operating loss of $4.9 million in fiscal 2014 resulted in a negative 1.4% operating margin, significantly down from 0.4% in fiscal 2013. However, the biggest driver was the impact of certain property write-offs, resulting in higher depreciation expense. As a result, FMH's operating EBITDA margin of 7.4% in fiscal 2014 was only slightly below the 7.8% margin in fiscal 2013 and Fitch's median of 7.9%. Other one-time expenses included reorganizational costs associated with FMH's operations under Maryland's GBR program, which focuses on providing care in the most cost effective setting, as well as increased physician group losses. Management expects to achieve $1.5 million in operating income (0.4% operating margin) in fiscal 2015, which Fitch views as feasible given various strategic initiatives underway and the stability provided under the GBR program.

In 2014 FMH formed Trivergent Health Alliance (THA), a management services organization (MSO), along with Meritus Health (rated 'BBB'; Stable by Fitch) and Westrn Maryland Health System. The affiliation will give FMH access to cost efficiencies in the areas of information technology, pharmacy, laboratory services and human resources, facilitate clinical quality improvements, and provide a platform for population health management. The MSO participation is expected to produce approximately $8 million in cost savings over the next three years for FMH.



CHANGING OPERATING ENVIRONMENT

FMH signed onto Maryland's GBR program in February 2014 (retroactively effective July 1, 2013). Under this program, FMH will receive fixed annual gross revenues on its regulated service lines that will be based on financial, utilization, and quality metrics, including certain patient-centered and population-focused performance standards and readmission reduction clauses. The revenue will be adjusted on an annual basis and is designed to incentivize hospitals to reduce avoidable volumes. Fitch believes that the program should provide needed stability as FMH navigates operating in a declining volume environment. Additionally, FMH formed the Frederick Integrated Healthcare Network as part of its population health management strategy, which should prove beneficial under the new operating environment. Unregulated service lines include FMH's radiology, lab, hospice, home health and diabetes center services, amongst others.


GROWING LIQUIDITY

Since fiscal 2010, FMH has grown its unrestricted cash and investments by approximately 62% from $103 million to $166 million in fiscal 2014. FMH's improved liquidity position equated to 186 DCOH, an 11.9x cushion ratio, and 96% cash to debt, all of which exceeded Fitch's 'BBB' category medians of 145 days, 10.5x, and 93.6%, respectively. FMH's solid liquidity is expected to continue growing in the medium term, and remains a primary credit strength.

HIGH DEBT BURDEN

FMH's debt burden remains elevated as evidenced by MADS as 4% of revenues in fiscal 2014, which is unfavorable to Fitch's median of 3.6%. Despite weakened profitability in 2014, sound cash flows allowed for stable MADS coverage by EBITDA of 2.1x which was unchanged from fiscal 2013 results but weaker than the median of 2.6x. With improved performance in fiscal 2015, management expects near-term recovery in coverage metrics to a level more consistent with the 'BBB+' rating.

HEALTHY CAPITAL SPENDING

FMH has completed phase 1 of its capital project, which included the construction of a new parking garage, the relocation of the hospital's helipad, and renovations to create additional inpatient private rooms (funded by 2012 bond issue). Phase 2 of the project is under development, and will involve the renovation of FMH's emergency department, main entrance and other public areas. Additionally, FMH is actively fundraising for the future construction of a new cancer center. The center is expected to be funded entirely via fundraising and management reports that FMH has no additional debt plans over the medium term. Capital spending in fiscal 2015 totals $43.6 million, of which $15 million will be funded from existing bond proceeds.

DEBT PROFILE

FMH has approximately $168 million of outstanding debt which is composed of approximately 59% fixed-rate and 41% privately placed variable-rate debt. The private placement has an initial term of ten years (2022). Further, FMH is counter-party to a $69 million floating to fixed rate swap with UBS (rated 'A/F1' by Fitch). As of June 30, 2014, fair market value of the swap was negative $11.2 million. FMH has no collateral posting requirements associated with the swap.

DISCLOSURE

FMH provides annual and quarterly disclosure to EMMA. Overall, Fitch views FMH's disclosure favorably, which consists of a balance sheet and statement of profitability and loss, cash flow statement, and utilization information.

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

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria' (June 16, 2014);

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

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

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

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=878614

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.


[ Back To TMCnet.com's Homepage ]