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Fitch Affirms Cullman Regional Medical Center's (AL) Revs at 'BB+'; Outlook Stable
[November 11, 2014]

Fitch Affirms Cullman Regional Medical Center's (AL) Revs at 'BB+'; Outlook Stable


CHICAGO --(Business Wire)--

Fitch Ratings has affirmed the 'BB+' rating on the following Health Care

Authority of Cullman County bonds issued on behalf of Cullman Regional Medical Center (CRMC):

--$63.7 million revenue bonds, series 2009A.

The Rating Outlook is Stable.

SECURITY

The bonds are supported by a pledge of revenues, mortgage, and debt service reserve.

KEY RATING DRIVERS

CONTINUED OPERATING IMPROVEMENT: CRMC's operating EBITDA margin of 9.7% in fiscal 2014 (June 30 year-end) was improved from 9.1% in fiscal 2013 and 5.4% in fiscal 2012, and was ahead of budget. CRMC's operating EBITDA margin was stable at 9.7% through three-month interim period of 2015 and was above the 'below investment grade' (BIG) median of 7.3%.

SOLID LIQUIDITY: CRMC's unrestricted liquidity position remained solid with 174 days cash on hand (DCOH), 69.6% cash to debt and a 7.6x cushion ratio, all of which compared favorably to Fitch's 'BIG' medians of 74.8 days, 55.7% and 5.3x, respectively. However, liquidity metrics in relation to debt remain well below Fitch's investment grade medians of 93.6% cash to debt and 10.5x cushion ratio.

STRONG MARKET POSITION: CRMC's sole community hospital (SCH) designation and 88.7% market share in its primary service area (PSA) allow CRMC to benefit from strong volumes and payor contracts, as well as enhanced Medicare reimbursement.

SIGNIFICANT LEVERAGE: CRMC's debt burden is elevated for the rating level, as evidenced by maximum annual debt service (MADS) at 6% of total revenues in fiscal 2014. However, CRMC's debt service coverage by EBITDA was a strong 2.5x in the same year, given improved operations. No additional debt is expected over the medium term.

RATING SENSITIVITIES

OPERATING STABILITY EXPECTED: Fitch expects CRMC's operations to stabilize at levels commensurate with fiscal 2014 performance, which would support further liquidity growth and solid debt service coverage going forward.

MODERATION OF DEBT BURDEN: Given CRMC's relatively small revenue base, further moderation of its debt burden to levels more consistent with the 'BBB' category median would be a necessary precursor of any upward rating movement.

CREDIT PROFILE

CRMC is an acute care general hospital with 145 licensed beds (115 beds in service), located in Cullman, AL, which is 50 miles north of Birmingham. CRMC is designated as a Level III trauma center and the only provider of interventional cardiology services through an affiliation agreement with University of Alabama Medical System at Birmingham (UAB) between Birmingham and Huntsville. Total revenues were $96.6 million in fiscal 2014.

CONTINUED OPERATING IMPROVEMENT

CRMC's breakeven operating performance in fiscal 2014 equated to a strong 9.7% operating EBITDA margin, which was ahead of budget and compared will to Fitch's 'BIG' median of 7.3%. CRMC contined the positive operating trend through the interim period with a stable 9.7% operating EBITDA margin. Management is budgeting to achieve similar operating results in fiscal 2015, which Fitch views as feasible given the positive trajectory of current operations coupled with CRMC's ongoing revenue cycle and cost savings initiatives.



CRMC is expecting to become a non-risk-bearing affiliate of a regional care organization (RCO), under Alabama's proposed capitated payment program (established through the 1115 Demonstration Waiver). The program is expected to begin in October 2016; however CRMC anticipates being prepared by as early as October 2015. Fitch believes that becoming an early adopter of this new reimbursement model will position CRMC well going forward under health reform.

STRONG MARKET POSITION


CRMC's leading market position enables it to receive enhanced governmental reimbursement, as well as benefit from increased leverage in negotiations with payors, providers and suppliers and makes it an attractive partner in the region.

In an effort to strengthen its market position, and reduce costs as part of an increasingly value-based health care environment, CRMC is expecting to focus on expanding its outpatient presence. In addition, management expects to further develop a number of key specialty service lines, including neurology and cardiology, which should help position it to become a destination hospital in the region. Currently both initiatives are in the planning stages and were not incorporated in to the 2015 budget.

SIGNIFICANT LEVERAGE

CRMC's leverage position remains the primary credit concern with MADS equating to a high 6% of fiscal 2014 revenues, compared to Fitch's 'BIG' median of 4%. In addition, CRMC's $43.7 million in unrestricted cash and investments at fiscal 2014 year-end equated to 69.6% of its total debt, solid for the 'BIG' category, but light compared to the investment grade median of 93.6%. According to Fitch's calculations, CRMC's debt service coverage by EBITDA was a strong 2.5x in fiscal 2014. MADS coverage was a solid 2.0x according to CRMC's covenant calculations. Fitch expects CRMC's leverage to continue to moderate as its revenues and cash position grow; CRMC has no additional debt plans and capital needs are expected to remain manageable over the medium term.

DEBT PROFILE

All of CRMC's outstanding debt is fixed rate, and it has no derivative instruments.

DISCLOSURE

The hospital covenants to disclose quarterly unaudited (within 60 days) and annual audited financial statements (within 120 days) including management discussion and analysis to the Municipal Securities Rulemaking Board's EMMA System.

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

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated 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=920555

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