TEXT-Fitch affirms East Texas Medical Center revs
Oct 10 - Fitch Ratings has affirmed the 'BBB' rating on the following bonds issued on behalf of East Texas Medical Center (ETMC): --$35.8 million Wood County Central Hospital District hospital revenue bonds, series 2011; --$270.8 million Tyler Health Facilities Development Corporation hospital revenue bonds, series 2007A. The Rating Outlook is Stable. SECURITY The bonds secured by a pledge of gross revenues of the obligated group and by a first mortgage lien on approximately 80% of total property. KEY RATING DRIVERS CAPITAL NEEDS WANING: ETMC's last major capital projects will be completed in fiscal 2013, including the Quitman replacement hospital project which is slated to open in summer 2013 and the full roll-out of its inpatient electronic medical record (EMR) during fiscal 2013. CASH FLOW IMPROVEMENT EXPECTED: ETMC's operating margin fell to 0.7% through the 2012 interim period, but is expected to improve to nearer 2.5% in fiscal 2013 as patient volumes and revenues stabilize, expense reductions are realized, and construction projects wind down. MANAGEABLE DEBT BURDEN: Despite some erosion in profitability through the nine-month interim period ended July 31, 2012, ETMC's coverage and leverage metrics continue to reflect a manageable debt burden. While coverage of MADS by EBITDA slipped to 2.0x, debt to EBITDA of 4.7x and debt to capitalization of 51.8% are comparable to Fitch's 'BBB' category medians of 4.2x and 49.1%, respectively. LIQUIDITY REMAINS LIGHT: ETMC's liquidity metrics remain light for the rating level, but declining capital needs should allow for balance sheet replenishment over the next 12-24 months if ETMC can maintain its operating cash flow ahead of fiscal 2013 capital needs, which will largely be funded via prior bond proceeds. SOME MARKET CHALLENGES: Volume trends have been largely negative in fiscal 2012, following two years of inpatient volume declines. Further, ETMC's primary service area (PSA) market share slipped 38.5% in year-to-date (YTD) 2012, down slightly from 42.4% in 2010. Fitch believes ETMC will need to stem further declines in patient volumes to achieve expected improved operating results in 2013. CREDIT PROFILE The rating affirmation at 'BBB' is supported by the completion of ETMC's major capital projects over the next fiscal year and its manageable debt burden which should further moderate to help offset a light balance sheet and some erosion in cash flow. Fitch believes there is minimal room at the 'BBB' rating for any further deterioration in cash flow, and expects ETMC to preserve its profitability at levels consistent with the 'BBB' category going forward. ETMC will spend approximately $72 million in fiscal 2012 and $62 million in fiscal 2013, wrapping up its remaining major projects. The replacement hospital in Quitman will open in the summer of 2013, and ETMC will complete its ongoing EMR roll-out across 13 of its 15 acute care facilities in 2013 after completing two to date. There are $24.8 million in series 2011 bond funds remaining, which will finance the Quitman replacement expenditures (approximately $30 million in construction cost including capitalized interest). Declines in patient volumes in 2012 have further pressured ETMC's profitability, but ETMC continues to reduce its expense base to keep it in line with revenues. Further, better clinical documentation and patient management is expected to generate $8 million in net improvements in fiscal 2013. Fitch believes market pressures may have negatively impacted clinical volumes in fiscal 2012, particularly inpatient admissions and births. ETMC will need to stabilize overall clinical volumes in fiscal 2013 to achieve its targeted operating performance. Unrestricted liquidity metrics remain low for the rating. At July 31, 2012, ETMC had $191.2 million in unrestricted cash and investments equating to 80.7 days of cash on hand (DCOH) and 47.4% cash to debt. Fitch notes ETMC has a conservative investment allocation, with only $6 million in equities as of fiscal 2011, but an unfunded pension liability will require a $10.6 million contribution in 2012 and additional contributions going forward to improve its 62.9% funded status (as of fiscal 2011). Still, Fitch expects ETMC will generate sufficient cash flow to allow for some balance sheet growth, and unrestricted liquidity is projected to increase to $205.2 million in fiscal 2013. ETMC's debt burden remains manageable for its revenue size, and no further debt is expected. At July 31, 2012 ETMC had a total $442.2 million in long term debt and capital leases, of which $5.3 million is variable rate. Debt service is front loaded due to the amortization of $53 million in capital leases, with maximum annual debt service measured at $43.9 million. The Stable Outlook is supported by Fitch's expectation that ETMC will improve its cash flow to levels more consistent with the rating category, and sufficient to address its capital plans. ETMC is planning for approximately $28 million in operating income in 2013, representing significant improvement over the expected $3 million in fiscal 2012. Negative rating action could occur should ETMC fall short of these results in 2013, particularly to a below-breakeven margin. ETMC is an integrated health system servicing the east and northeastern regions of Texas. The system consists of 15 facilities with approximately 1,000 staffed acute care beds. Total revenues were $1.02 billion in fiscal 2011. ETMC covenants to provide bondholders with annual audited financial information to the Municipal Securities Rulemaking Board's EMMA system within 150 days of fiscal year end and quarterly financial statements within 45 days of fiscal quarter end.
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