Fitch Ratings has assigned a 'BB+' rating to the Flint Hospital Building Authority's expected issuance of approximately $22 million series 2013A fixed-rate revenue rental bonds and approximately $37 million series 2013B fixed-rate revenue refunding bonds issued on behalf of Hurley Medical Center.
In addition, Fitch Ratings has affirmed the 'BB+' rating on the following fixed-rate bonds issued on behalf of Hurley Medical Center (HMC) by Flint Hospital Building Authority (Michigan):
--$8,835,000 revenue refunding bonds, series 1998A;
--$14,665,000 revenue rental bonds, series 1998B;
--$23,360,000 hospital revenue and refunding bonds, series 2003;
--$34,215,000 revenue rental bonds, series 2010.
HMC has approximately $4.7 million outstanding on its series 2011 direct placement, which Fitch does not rate.
The Rating Outlook is Stable.
Proceeds of the series 2013A bonds will be used to finance capital projects and installation of equipment at Hurley Medical Center, fund a debt service reserve fund and pay certain costs of issuance. The proceeds of the series 2013B bonds will be used to refund all or a portion of the series 1998A &B bonds and the series 2003 bonds for savings, fund a debt reserve fund and pay certain costs of issuance. Maximum annual debt service (MADS) was calculated by the underwriter and is expected to be about $10.84 million. The bonds are expected to sell via negotiation the week of Feb. 25, 2013.
Debt payments are secured by cash rentals (net revenues of the Medical Center) made to the authority, acting through its Board of Hospital Managers, on behalf of HMC as agreed under the eighth amended and restated contract of lease dated Feb. 1, 2013. In addition, bondholders will benefit from a fully funded debt service reserve fund.
SENSITIVITY/ RATING DRIVERS
ADEQUATE LIQUIDITY: Liquidity metrics remain adequate for the rating category despite a decrease since Fitch's last review. Unrestricted cash and investments at Dec. 31, 2012 of $64.3 million was down from $70.6 million at fiscal year-end 2012 (year ended June 30) and $85.3 million at fiscal year-end 2011, mostly due to significant capital spending and weak operating cash flow. The series 2013 financing will strengthen Hurley's balance sheet with $7 million of reimbursement for prior capital expenditures.
HISTORICALLY MARGINAL OPERATING PERFORMANCE: Operating performance in fiscal 2012 with operating margin of negative 1.3% and operating EBITDA of 3.6% was below prior years, reflecting the impact of several one-time expenses. Fitch expects performance to return to break-even results in fiscal 2013.
CHALLENGING PAYOR MIX: Located in Flint, Michigan, HMC operates in a competitive service area with below-average socioeconomic indicators, subjecting the hospital to elevated levels of government payors, with Medicaid at a very high 39.4% of gross revenues in fiscal 2012.
MANAGEABLE DEBT BURDEN: Pro forma MADS comprised a manageable 3% of total fiscal 2012 revenues. Coverage of pro forma MADS by EBITDA of 1.8x in fiscal 2012 is adequate for the rating category.
The 'BB+' rating reflects HMC's adequate liquidity for the rating category and relatively stable operating performance despite operating in a difficult market with a high Medicaid population. Located in Flint, Michigan, HMC is a safety-net teaching hospital and is the only provider in the region of Level I Trauma, Level II Pediatric Trauma and Level III Neonatal Intensive care, among other services. HMC has an active outreach effort with many community organizations and is focusing on improving community health.
Unrestricted liquidity declined in fiscal 2012 and through the interim period due to high capital spending and weak operating cash flow. At Dec. 30, 2012 unrestricted cash and investments was $64.3 million, equating to a light 66.8 days cash on hand, 5.9x pro forma cushion ratio and 60.8% pro forma cash to debt (Fitch factored $22 million of new money into the analysis). With this financing HMC will put $7 million back on the balance sheet as reimbursement for capital expenditures. This will result in unrestricted cash and investments of $71.3 million, equaling 74.1 days cash on hand, 6.6x pro forma cushion ratio and 67.5% pro forma cash to debt. Fitch expects liquidity to stabilize in the near term. Further deterioration to liquidity would likely result in downward rating pressure.
HMC has been heavily investing in its plant with capital expenditures averaging a high 246% of depreciation expense from 2010 - 2012. HMC's most recent large capital project was the expansion of its emergency department (ED) to account for high volumes that could not be accommodated in its former space. This project was successful and the expansion and redesign has allowed for improved patient flow, operating efficiencies and improved patient care. In addition, management expects to be better able to appropriately manage observation patients with the addition of a 12-bed observation unit in the ED.
HMC's operating performance has been relatively stable over the last three fiscal years but was impacted in fiscal 2012 by several one-time expenses, including $2.2 million for EPIC electronic medical record training, $1.6 million for severance costs associated with upper management turnover and $300,000 for additional supplies and staffing associated with the opening of the ED. In fiscal 2012, HMC posted negative 1.3% operating margin and 3.6% operating EBITDA margin. Adjusting for about $4.1 million in one-time expenses, operating margin was near break-even and operating EBITDA was about 4.7%. Management is actively managing expenses, and initiatives include employee health care benefit redesign, legacy cost review, Six Sigma, more efficient purchasing process and observation case management. Fitch expects break even operating profitability in fiscal 2013.
HMC's debt profile is manageable with all fixed-rate debt and pro forma MADS equating to 3% of fiscal 2012 total revenue. Pro forma MADS coverage by EBITDA was a relatively light 1.8x in fiscal 2012 but consistent with the prior years' results of 1.7x in fiscal 2011 and 2010. Through the six-month interim period ended Dec. 31, 2012 MADS coverage by EBITDA improved to 2.2x. Since HMC is a governmental entity, its investment portfolio is very conservative as investments are restricted to government-issued fixed-income securities.
The primary credit risks include a challenging economic environment and reliance on state Medicare disproportionate share (DSH) revenues. Located in Flint, Michigan, HMC operates in an economically distressed service area with a challenging payor mix. A high 39.7% of gross revenues were derived from Medicaid and 27% from Medicare at December 31, 2012. Uncertainty over the continuation of current Medicaid funding levels, given the state's budget distress and national budget pressures, remains a significant credit risk. Material funding reductions would have a major impact on HMC's ability to improve profitability.
The Stable Outlook reflects Fitch's expectation that HMC will stabilize its operations and liquidity position. Continued deterioration to liquidity or profitability would likely result in negative rating pressure.
HMC is a 443-bed acute care teaching hospital with safety-net provider status located in Flint, Michigan. HMC had approximately $362.5 million of total revenue in fiscal 2012. HMC covenants to provide annual and quarterly disclosure to the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com' . The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from Raymond James, the Underwriter and Kaufman Hall, the Financial Advisor.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (July 23, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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