|[December 19, 2012]
Fitch Affirms Rehoboth McKinley's (NM) 2007A Bonds at 'B'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed the rating on the approximately $6.58 million
New Mexico Hospital Equipment Loan Council (Rehoboth McKinley Christian
Health Care Services, Inc.) hospital facility improvement and refunding
revenue bonds, series 2007A at 'B'.
The Rating Outlook is Stable.
The bonds are secured by a pledge of revenues and equipment. In
addition, there is a debt service reserve fund.
KEY RATING DRIVERS
VOLATILE FINANCIAL PERFORMANCE WITH RECENT IMPROVEMENT: Rehoboth
McKinley Christian Health Care Services' (Rehoboth) financial
performance has historically been very volatile and reflective of the
challenges of a hospital with a small revenue base and unfavorable payor
mix. Most recently, a number of events caused significant deterioration
to its financial position in fiscal 2011, which has rebounded through
the nine months ended Sept. 30, 2012 (interim period). In addition,
Rehoboth has announced its intent to pursue a strategic affiliation,
which Fitch views favorably as it could help to stabilize operations and
PRECARIOUS LIQUIDITY POSITION: Rehoboth has drawn down its cash position
due to weak cash flow with only $1.4 million of unrestricted cash at
Sept. 30, 2012 (9.3 days cash on hand) compared to $10.4 million at Dec.
31, 2010 (66 days cash on hand). Although Rehoboth remains in violation
of its liquidity covenant, the failure to meet its days cash on hand
requirement does not result in an event of default.
RELIANCE ON (News - Alert) SUPPLEMENTAL FUNDING: Rehoboth remains highly reliant on
sole community provider (SCP) funds and tax revenue from a mill levy for
profitability. SCP funding was restored to historical levels in fiscal
2012, which contributed to the rebound in performance through the
CONTINUED MANAGEMENT TURNOVER: Over Fitch's rating history of Rehoboth,
there has been significant management turnover. The current CEO is on an
interim basis and is expected to remain at Rehoboth through the spring
SMALL REVENUE BASE: Fitch believes Rehoboth's small revenue base remains
a key credit concern as the hospital has limited flexibility to handle
adverse events, which was most recently demonstrated in fiscal 2011 but
has also been evident in Rehoboth's history.
Rehoboth's rating history has fluctuated between the 'B' and 'BB'
category since 2005 and reflects the volatility in Rehoboth's financial
performance in addition to constant management turnover. Since Fitch's
last review in June 2012, the interim CFO has since moved to a
consultant position and the comptroller is now serving as interim CFO. A
search is underway for both the CEO and CFO positions but the interim
CEO has committed to stay in his capacity until spring 2013. The Board
of Trustees announced in October 2012 their intent to explore possible
strategic affiliations. Although management is still in the exploratory
stage, Fitch believes a partnership or strategic affiliation would be a
Financial performance has improved in fiscal 2012 from the very poor
fiscal 2011 performance but still remains very volatile and dependent on
supplemental funding. Supplemental funding in the form of SCP funds and
the mill levy are critical, since without these funds, Rehoboth would be
unprofitable. In fiscal 2011, there was litigation surrounding the
mechanism behind the SCP funding, which resulted in a delay n the SCP
payment. SCP funding was restored after the state litigation was settled
in late fiscal 2011. Total supplemental funding is expected to be $12.8
million for fiscal 2012 compared to $8.7 million in fiscal 2011 and $10
million in fiscal 2010. Fitch views the timely and continued payment of
this supplemental funding to be critical to the stability of Rehoboth's
Rehoboth benefits from a mill levy imposed by the county, which is
included in the total supplemental funding. The funds from the mill levy
totaled $1.6 million in fiscal 2011 compared to $1.4 million in fiscal
2010 and are expected to total about $1.4 million in fiscal 2012. The
mill levy expired in 2012 but McKinley County voters approved the
renewal of the mill levy and changed the language to allow for the
hospital to levy up to four mills from up to two mills. Also, the mill
levy now allows for funds to be used as a match for SCP funding. This
change becomes effective July 1, 2013. Hospital management is meeting
with county officials to discuss its levy request for 2013. Rehoboth's
debt service coverage calculation excludes the mill levy revenue as a
source of funds.
Other financial improvement measures include cost controls resulting in
about $7 million in savings, revenue cycle modifications increasing cash
flow from collections, as well as a rate increase, which was implemented
in July 2012. Although patient volumes were down about 6% in 2012 from
2011, a reduction in force completed in August 2012 resulted in improved
operations. At Sept. 30, 2012 (nine-month interim), operating margin
improved to negative 0.5% from negative 10.7% in fiscal 2011. Operating
EBITDA margin was 4.3% at Sept. 30, 2012, also an improvement from
negative 6.4% in fiscal 2011. Management expects break-even performance
for fiscal 2012 and based on current performance, Fitch believes this is
Revenue cycle issues and the negative cash flow in fiscal 2011 resulted
in a drain on cash to only 5.2 days cash on hand and 13% cash to debt in
fiscal 2011, from 65.9 days and 136.8%, respectively, the prior year.
Unrestricted cash and investments as of Sept. 30, 2012 resulted in 9.3
days and 21.9% cash to debt and should further improve by year-end as a
portion of the SCP funding for fiscal 2012 has not yet been received
to-date but is expected prior to year-end. Fitch notes that Rehoboth's
liquidity position is precarious and any deterioration would lead to
negative rating action. Rehoboth has a liquidity covenant of 23 days in
fiscal 2012 and 25 days in fiscal 2013. Management does not expect to
meet this covenant in fiscal 2012 but failure to do so does not
constitute an event of default.
Although Rehoboth maintains the dominant market position of 62% in its
service area, the payor mix is challenging with 28.1% of revenues from
Medicaid as of Sept. 30, 2012 and 8.8% self-pay. Rehoboth's revenue mix
is about 36% inpatient and 64% outpatient.
Total debt outstanding is $7.04 million including $6.58 million of bonds
and $463,000 of capital leases. All of the debt is fixed rate and Fitch
used maximum annual debt service (MADS) of $841,586, which includes the
capitalized leases. Because of the low debt burden, MADS coverage
through the nine months ended Sept. 30, 2012 was 3.2x.
The Stable Outlook reflects Fitch's expectation that Rehoboth will
sustain and continue to better its improved financial performance. No
additional debt is expected in the near to medium term.
Rehoboth McKinley Health Care Services, Inc. is a 69-bed general acute
care hospital located in Gallup, New Mexico (138 miles west of
Albuquerque, NM and 180 miles east of Flagstaff, AZ). Rehoboth changed
its fiscal year end in fiscal 2010 to December from August. Total
operating revenue in fiscal 2011 was $64.5 million. Rehoboth covenants
to provide annual financial statements within 30 days after the approval
of the report by the state auditor, which has usually resulted in fairly
late receipt of audits. Rehoboth has also been posting monthly financial
statements on EMMA.
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', dated June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated July
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria
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