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| [November 07, 2012] |
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Fitch Affirms Peterson Regional Medical Center (TX) Revs at 'BBB-'; Outlook Negative
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the 'BBB-' rating on the following Kerrville
Health Facilities Development Corporation bonds, issued on behalf of Sid
Peterson Memorial Hospital (dba Peterson Regional Medical Center, PRMC):
--$70.8 million hospital revenue bonds, series 2005;
The Rating Outlook is revised to Negative from Stable.
SECURITY
The bonds are secured by a pledge of gross revenues, a debt service
reserve, and a mortgage on hospital property.
KEY RATING DRIVERS
LOSS OF ENHANCED MEDICARE STATUS: The Outlook revision to negative
reflects Fitch's concern regarding the loss in supplemental funding as
the hospital's sole community hospital (SCH) status was terminated in
2012. The hospital had to book the impact of the loss of SCH status,
which was retroactive to fiscal 2008 and totaled $14.7 million for the
fiscal years 2008 - 2012. This resulted in a material decline in
profitability and coverage ratios for fiscal 2012 (June 30 year end;
draft audit).
WEAKENED DEBT SERVICE COVERAGE: PRMC will have a debt service coverage
covenant violation in fiscal 2012 (less than 1.15x), but will not
trigger an event of default. PRMC has engaged a consultant to comply
with its indenture requirement, and will continue undertaking
significant expense adjustments and operating improvements and expects
to which should produce coverage more in line with Fitch's 'BBB' medians
in fiscal 2013.
STRONG BALANCE SHEET: The 'BBB-' rating continues to be supported by
PRMC's solid balance sheet, with metrics which outperform Fitch's 'BBB'
category medians. Solid liquidity is expected to offset its small
revenue base and history of light profitability for the rating category.
STABLE MARKET POSITION: PRMC's position as the only hospital within its
service area provides for a stable and leading market position. In 2012,
PRMC maintained an inpatient market share of 66% against the 10% share
of its closest competitor.
CREDIT PROFILE
The outlook revision is driven by the financial impact of the reduced
revenue going forward, which will be a challenge to manage especially
since PRMC still had operating losses with the supplemental funding in
the last four years.
PRMC's SCH status was terminated in 2012, with retrospective impact to
fiscal years 2008-2012. The impact to fiscal 2012 was $14.8 million, of
which $2.7 million is included in net patient revenue and $12.05 million
was reflected as a one-time non-operating expense. With this impact,
PRMC's EBITDA was a negative -$2.6 million, and as such the 1.15x rate
covenant will be missed.
It is Fitch's expectation that PRMC will improve its profitability and
debt service coverage levels in 2013 to levels more reflective of the
'BBB' category. In addition to the consultant engaged for the bond
covenant violation, PRMC retained a consultant in late 2011 ahead of its
SCH status termiation, and is now implementing many of their
recommendations. PRMC is undergoing several initiatives to improve its
operating performance, and is budgeting for better than breakeven
operating margin performance in fiscal 2013. Should PRMC fail to improve
its operating performance in fiscal 2013, negative rating pressure is
likely.
Without the $12.05 million in estimated losses (included as a
non-operating expense in fiscal 2012) pertaining to 2008-2011, PRMC
would have produced a 9.2% EBITDA margin and 1.6x coverage of MADS in
fiscal 2012. Further, coverage by operating EBITDA was 1.3x, which
includes the $2.7 million estimated loss to revenue for 2012. PRMC has
appealed Medicare's decision to terminate its SCH status, and PRMC has
already made a $1.8 million requested payment to Medicare. Fitch does
not expect the appeal to be successful.
PRMC's key credit strengths include a healthy balance sheet and a stable
and leading market position. At June 30, 2012 PRMC had $89 million in
unrestricted liquidity, equating to 362.8 days of cash on hand (DCOH)
and 125.8% cash to debt, well ahead of Fitch's 'BBB' category medians of
138.9 DCOH and 82.7% cash to debt. However, a healthy balance sheet is
expected to offset the risks associated with PRMC's small revenue base
including exposure to negative events, such as the impact in fiscal 2012.
PRMC's capital needs are light, as reflected in a low 6.4 year age of
plant in fiscal 2012. No additional debt is expected, and at June 30,
2012 PRMC had $70.8 million in long-term fixed-rate debt, which is all
fixed rate. MADS is $5.9 million.
The service area has somewhat mixed economic indicators against state
averages, but PRMC's leading 66% inpatient market share should help
provide for stable volume and patient revenues going forward. The
nearest competitor, Hill Country Memorial Hospital, had 10% share in
2012. Further, despite its rural location PRMC has managed to recruit at
sufficient levels to preserve its physician base, and now has 32 total
primary care physicians, up from 25 in 2011.
The Negative Outlook reflects Fitch's concern about PRMC's ability to
improve operating performance to offset the loss in supplemental funding
and potential Medicare reimbursement cuts (Medicare comprises
approximately 60% of gross revenues). The failure to improve operating
performance and debt service coverage in fiscal 2013 would likely result
in negative rating pressure.
PRMC is a 124-licensed-bed community hospital located in Kerrville, TX.
PRMC had total operating revenues of $99.7 million in unaudited fiscal
2012. PRMC covenants to provide audited annual financial statements
within 150 days of fiscal year end and quarterly disclosure within 45
days of quarter end to bondholders. Disclosure information is
disseminated through the Municipal Securities Rulemaking Board's
Electronic Municipal Market Access (EMMA) system and includes balance
sheet, income statement, statement of cash flows, and utilization
statistics.
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.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=681015
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=683418
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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'.
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