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Fitch Affirms Owensboro Health (KY) Revs at 'BBB+'; Outlook StableFitch Ratings has affirmed the 'BBB+' rating on the following Kentucky Economic Development Finance Authority bonds, issued on behalf of Owensboro Medical Health System (dba Owensboro Health; Owensboro): --$451.3 million series 2010A; --$64.6 million series 2010B. The Rating Outlook is Stable. SECURITY The bonds are secured by a pledge of revenues, a mortgage lien, and a debt service reserve fund. KEY RATING DRIVERS IMPROVING CASH FLOW: Following weaker results in fiscal 2014 (May 31 year-end) Owensboro generated a 15.9% operating EBITDA and 16.7% EBITDA margin through Nov. 30, 2014. Results were supported by better clinical volumes and strong expense management. Coverage of maximum annual debt service (MADS) equaled 2.2x by EBITDA, up from 1.4x in fiscal 2014. Owensboro is ahead of budget, which calls for a more modest 13% operating EBITDA margin. SIGNIFICANT DEBT BURDEN: Owensboro's debt level remains very elevated for the 'BBB+' rating level, evidenced by debt to capitalization of 59.4% through the six-month interim period ended Nov. 30, 2014 against Fitch's 'BBB' category median of 44.9%. Absent material improvement in cash flow or liquidity, additional debt would likely pressure the rating. VERY STRONG MARKET POSITION: Owensboro maintains a dominant market position, as demonstrated by over 90% inpatient share within Daviess County and leading share within adjacent counties in Kentucky and Indiana. The new facility has supported clinical volume growth and physician recruitment efforts, and strengthens its position as a regional referral center in central Kentucky. MIXED LIQUIDITY: As expected, Owensboro' balance sheet was impacted by approximately $35 million in equity contributions during fiscal 2014 (year ending May 30). At Nov. 30, 2014 unrestricted liquidity equaled $204.8 million, equal to 169.7 DCOH and 41.3% cash to debt against Fitch's 'BBB' category medians of 145 DCOH and 93.6% cash to debt. Steady liquidity is expected going forward. RATING SENSITIVITIES STEADY OPERATING PERFORMANCE: Sustaining robust cash flow levels will be necessary to produce sufficient debt service coverage and preserve liquidity going forward. Failure to sustain current cash flow levels, a decline in debt service coverage, or an unexpected drop in liquidity would likely prompt negative rating pressure. CREDIT PROFILE Owensboro Health is a 447-licensed-bed health system located in Owensboro, KY, approximately 100 miles southwest of Louisville, KY. Total revenues for fiscal 2014 were $448.2 million (year ended May 31). Fitch uses consolidated financial statements in its analysis. The obligated group (OG) includes Owensboro (corporate parent, operating acute facilities) and Cooperative Health Services (CHS; owned & employd physician groups and MOB's). In fiscal 2014, total assets and revenues of the OG were $965 million and $440.8 million, respectively, or 99.5% of total assets and 98% of total revenues all of the consolidated organization. Fitch's analysis is based on the consolidated entity. OPERATING PERFORMANCE IMPROVEMENT Following fiscal 2014's slightly below budget results, Owensboro has recovered to operating cash flow levels more consistent with historical performance. Clinical volumes improved materially once a key connector between Kentucky and Indiana opened in late 2014. Additionally, management focus has controlled expenses to 3% below budget despite revenues remaining in line with budget through the six month interim period ended Nov. 30. LEADING MARKET POSITION Fitch notes that Owensboro retained its leading market share position, with 91.8% share in Daviess County and leading share between 55%-72% in the surrounding collar counties. Importantly, the key connecting bridges providing easy access to the new campus were reopened, which helped support volume growth. Fitch anticipates Owensboro's ongoing regional ambulatory growth strategy will continue to support its position as a referral center going forward. DEBT PROFILE As of Nov. 20, 2014 Owensboro had approximately $496.5 million in fixed rate bonds outstanding. MADS is equal to $37.9 million, and debt service is level through maturity in 2045. Owensboro has no swaps. DISCLOSURE Owensboro covenants to provide annual audited disclosure no later than 180 days following fiscal year end and quarterly disclosure no later than 45 days after quarter end for the first three quarters, and no later than 60 days following the fourth quarter. Disclosure is provided via the Municipal Securities Rulemaking Board's EMMA System. Fitch has received timely and thorough disclosure and maintained good access to management. Additional information is available at 'www.fitchratings.com' Applicable Criteria and Related Research: --'Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014); --'Revenue-Supported Rating Criteria' (June 18, 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 Revenue-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980663 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. |
