TEXT-Fitch affirms Stanly Memorial Hospital, N.C. revs at 'BBB+'
Sept 17 - Fitch Ratings has affirmed the 'BBB+' rating on the following health facilities revenue bonds issued by the North Carolina Medical Care Commission on behalf of Stanly Memorial Hospital (Stanly; d/b/a Stanly Health Services): --$11.2 million series 1999; --$11 million series 1996. The Rating Outlook is Stable. SECURITY The bonds are secured by a pledge of gross revenues, a negative pledge of assets, and a debt service reserve fund. KEY RATING DRIVERS IMPROVING CASH FLOW: The 'BBB+' is supported by improved operating profitability in the 10-month interim period ended July 31. After declines in 2011, positive trends in surgical and other outpatient volumes have had a favorable impact on revenues in 2012. FUTURE CAPITAL PLANS: Stanly is increasing its capital spending following several years of low expenditures. Its current debt burden is light, and future capital spending is likely to be partially debt-financed. Fitch believes Stanly has capacity for additional debt. PAYOR MIX A CONCERN: Fitch's main credit concern is Stanly's weak payor mix with a high level of government payors as evidenced by a high 61.7% of gross revenues through July 2012. Further, Stanly also receives a significant amount of disproportionate share hospital (DSH) payments and has relatively high levels of bad debt. STEADY MARKET POSITION: Stanly is the only acute health provider in the Stanly County, and consistently maintains leading inpatient market share in its primary service area of approximately 47.8% in 2011 against 45.4% share in 2010. CAROLINAS HEALTHCARE SYSTEM AFFILIATION: Fitch believes Stanly's strategic alliance with the Charlotte-Mecklenburg Hospital Authority (which directly and through its affiliates does business as Carolinas HealthCare System, CHS) helps to mitigate certain operating risks. Through a 10-year management agreement, CHS provides executive management as well as financial oversight, contracting assistance, and physician practice, information technology, and revenue cycle support. CREDIT PROFILE The 'BBB+' rating is supported by Stanly's improved operating performance in fiscal year ended Sept. 30, 2011 and 10-month interim period ending July 31, 2012, strong coverage of a manageable debt level, elevated capital plans and likely debt issuance, and leading market position. While increased DSH/UPL moneys augmented 2011 and interim 2012 financial performance, Stanly also benefitted from improved volumes and better market share. Successful physician recruitment and better clinical volumes supported revenue growth, and Stanly finished fiscal 2011 ahead of budget with a 1.9% operating margin and 10.1% EBITDA margin. Improved cash flow has strengthened the balance sheet. At July 31, 2012, Stanly had $49.8 million of unrestricted cash and investments equating to 148.2 days cash on hand (DCOH) and 236.6% cash to debt, both ahead of Fitch's 'BBB' category medians of 138.9 DCOH and 82.7% cash to debt. Capital spending for fiscal 2012-2014 is projected at approximately $33 million (or 150%-200% of depreciation expense per year) including routine expenditures and campus renovation and equipment. This is much higher than historical spending which averaged $3.2 million (45% of depreciation expense) per year from fiscal 2007-2010. Stanly expects to finance these plans via cash flow and minimal debt issuance (below $10 million), which Fitch believes can be absorbed with limited impact to Stanly's financial profile. Stanly's payor mix presents ongoing concern; Medicare and Medicaid represented 61.7% of gross revenues through July 2011. Additionally, Stanly received $3.9 million in Medicare and Medicaid DSH/UPL funds in 2011, which will increase to $5.1 million in 2012. With Stanly's high exposure to government payors, the possible reduction in reimbursement at the state and national level presents credit risk to the stability of its revenue base. Stanly has $22.6 million in long-term debt, which is all fixed rate, and no swaps. Stanly's current debt burden is light, with maximum annual debt service (MADS) coverage by EBITDA of 4.0x in fiscal 2011 and 4.9x in interim 2012. Further, debt to capitalization is low at 21% in interim 2012, well below Fitch's 'BBB' category median of 49.1%. The Stable Outlook is based on an expectation of stable operating results against elevated capital spending, and balance sheet maintenance. Stanly is budgeting for a stable operating margin near 1% and EBITDA margin near 9.8% through 2013, which Fitch believes is reasonable against historical performance. Stanly Health Services is located in Albemarle, NC. The obligated group includes Stanly Regional Medical Center (119-bed acute care hospital), Stanly Manor (100-bed long-term care facility), and Stanlex Inc. (home health agency). Fitch analysis is based on the consolidated entity, which also includes the foundation, medical group, and Lifesmart Inc. (case management). Total revenues were $135.4 million in fiscal 2011. Stanly provides annual and quarterly disclosure to the Municipal Securities Rulemaking Board's EMMA System, including balance sheet, income statement and utilization statistics. Disclosure to Fitch has been timely and thorough. 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. This action was informed by the sources of information identified in the 'Revenue-Supported Rating Criteria'. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria', dated June 12, 2012. --'Nonprofit Hospitals and Health Systems Rating Criteria', dated July 23, 2012. Applicable Criteria and Related Research: Revenue-Supported Rating Criteria Nonprofit Hospitals and Health Systems Rating Criteria