Fitch Downgrades North Mississippi Health Services (MS) Revs to 'AA-'; Affirms S-T at 'F1+'
Fitch Ratings downgrades to 'AA-' from 'AA' the long-term rating on the following Mississippi Hospital Equipment and Facilities Authority revenue bonds issued on behalf of North Mississippi Health Services (NMHS):
--$71,630,000 revenue bonds, 2010 series 1;
--$18,425,000 revenue bonds, 2003 series 1;
--$29,175,000 revenue bonds, 2003 series 2;
--$40,000,000 variable-rate revenue bonds, 2001 series 1;
--$19,505,000 variable-rate revenue bonds, 1997 series 1.
Fitch also affirms the short-term 'F1+' rating on the 1997 series 1, the 2001 series 1, and both series of the 2003 bonds. The F1+ rating is based on self-liquidity.
Pledge of net revenues of the obligated group (North Mississippi Medical Center, Clay County Medical Corporation, and Webster Health Services, Inc.)
KEY RATING DRIVERS
DECLINING OPERATING PROFITABILITY: The downgrade to 'AA-' reflects the decline in NMHS' operating profitability over the last 18 months, which is expected to remain pressured over the outlook period. NMHS had a negative 5.1% operating margin through the first six months of fiscal 2013 (Sept. 30 year-end) and expects to end the year with an operating loss. Furthermore, the uncertainty around upper payment limit and disproportionate share funding in light of the state's pending decision to opt out of the Medicaid expansion further elevates NMHS' operating risk.
ROBUST LIQUIDITY A CREDIT STRENGTH: All of NMHS' key liquidity ratios remain above Fitch's 'AA' medians which provides NMHS a significant financial cushion as it addresses the challenges in its operating environment.
MANAGEABLE DEBT BURDEN: NMHS' MADS equates to a light 1.9% of fiscal 2012 revenues as compared to the 'AA' category median of 2.5%. Despite weaker profitability in 2012, NMHS generated coverage of MADS by EBITDA of 4.0x compared to the 'AA' category median of 4.8x. However, through the six month interim period MADS coverage by EBITDA was a light 2.0x.
LEADING MARKET POSITION: NMHS has a leading 40% market share in a large 24-county region of northeast Mississippi and southwest Alabama. Further, NMHS' market share is supported by a large base of employed physicians, approximately 55% of its active medical staff, including more than 100 primary care physicians.
'F1+' SHORT-TERM RATING: The 'F1+' short-term rating is supported by NMHS funds available for same-day settlement exceeding the maximum tender exposure of $107.1 million by 1.25x, as per Fitch's criteria.
DEVIATION IN OPERATING PERFORMANCE: NMHS will end fiscal 2013 with a negative operating margin, but Fitch expects NMHS' operating performance to improve in fiscal 2014, albeit not to pre-2012 levels. A longer trend of negative operating margins or a sustained improvement to its operating performance, neither of which is expected, could move the rating up or down.
North Mississippi Health Services is a diversified regional health care organization with six owned hospitals and two managed hospital and more than 30 primary and specialty clinics located across the region. Its flagship hospital, North Mississippi Medical Center, is located in Tupelo, MS, and is the largest hospital in Mississippi with 621 staffed beds. Tupelo is located roughly 100 miles southeast of Memphis, TN.
The obligated group (OG) consists of North Mississippi Medical Center, Clay County Medical Corporation, and Webster Health Services, Inc. In fiscal year 2012, the obligated group accounted for 89% of the total assets and essentially all of the system's operating income. Total system net revenue in fiscal 2012 was $720.5 million. Fitch's financial analysis is based on the consolidated statements of the system.
Weaker Recent Operating Performance
Through the first six months of fiscal 2013, NMHS had a negative 5.1% operating margin (a $19 million operating loss) and a 1.8% operating EBITDA margin. These results come after NMHS' fiscal 2012 results which were a thin 1.2% operating margin and 7.5% operating EBITDA margin. Fiscal's 2012's results were materially lower than its 3.7% operating margin and 9.6% operating EBTIDA margin in fiscal 2011 and were much lower than Fitch's 'AA-' medians of 4% and 10.6%, respectively. A further credit concern over the last 18 months has been the lack of revenue growth, which fell to below 1% in fiscal 2012, after NMHS had approximately 4% revenue growth per year in fiscal 2010 and 2011.
The operating losses in the fiscal 2013 interim period were driven largely by $11 million in one-time expenses related to an information technology conversion to Allscripts at its main campus in Tupelo. NMHS had completed the same conversions at its other smaller hospitals, the largest of which has 65 beds. The IT conversion at its 650-bed main campus proved more complicated and required additional staffing and contractual costs. As a result, patient flow was disrupted as NMHS made the transition to digital entry from paper records, causing longer length of stays, further suppressing its operating performance.
Additionally, NMHS was down five hospitalists in the early part of the year, which also caused patient flow issues and led to lower inpatient admissions. Inpatient admissions were 14,337 through the six-month fiscal 2013 interim period, a 5.4% decline from the prior year and approximately 9% below budget.
NMHS' management reports that it has worked through many of the challenges around Allscripts and, after another $11 million in budgeted expenses, expects the ongoing costs to be approximately $2 million a year. In terms of the hospitalists, NMHS' management indicated that it needs 18 hospitalists to meet current demands and that several strategies have been implemented to become fully staffed. NMHS expects to be fully staffed by September or October of this year, but the loss of the hospitalists and its effect on volumes are credit concerns.
NMHS' receives more than $30 million a year in supplemental funding from the upper payment limit and disproportionate share programs, from both Medicare and Medicaid. The expected reduction of funding in these programs, coupled with Mississippi's pending decision to opt out of the Medicaid expansion, adds a level of uncertainty through the outlook period.
NMHS' robust liquidity metrics are considered a primary credit strength. At March 31, 2013, NMHS had $530 million in unrestricted cash and cash equivalents, which equated to 261.3 days cash on hand, a 36.2x cushion ratio, and 280.2% cash to debt, all better than Fitch's 'AA' category medians of 241.1 days, 45.4x, and 169.4%, respectively. Fitch believes NMHS' liquidity position provides a substantial financial cushion to ensure timely payment of debt service despite the recent erosion in profitability and the uncertainties under health reform.
DEBT PROFILE AND CAPITAL SPENDING
NMHS' total outstanding debt is $178.7 million and NMHS' debt portfolio is aggressive with approximately 62% of variable rate demand bonds supported by self-liquidity and 38% fixed rate. Concerns about this level of variable debt are offset by NMHS' excellent liquidity especially relative to its $107.1 million of puttable bonds. NMHS has two swaps in place with a notional value of $48.1 million that synthetically fix a portion of the variable rate debt. The mark-to-market on the swaps as of March 31, 2013 is ($6.9 million). NMHS' collateral threshold at the 'AA' rating is $20 million.
In fiscal 2010, NMHS borrowed to finance major projects on its main campus that included a new west tower, a new central sterile processing facility, and a significant upgrade to its IT systems. The West Bed Tower project is 68% complete, with the new bed tower almost fully ramped up and renovation of the existing, older patient rooms on the rest of its main campus has begun. With the large project nearing completion, Fitch is not expecting NMHS to issue any additional debt over the next few years.
The 'F1+' rating reflects the sufficiency of NMHS' cash and investments position relative to its potential funding obligations on the $107.1 million of weekly VRBDs. At May 31, 2013, NMHS had over $345.5 million of cash, cash equivalents and fixed income investments. Based on Fitch's rating criteria related to self-liquidity, NMHS position of 'eligible cash and investments' available for same-day settlement easily exceeds Fitch's 1.25x threshold to cover the maximum tender exposure on any given date. NMHS provides Fitch regular liquidity reports and has a detailed procedures letter in place that delineates the process of liquidating funds in case of a tender.
NMHS covenants to provide annual and quarterly financial information (for the first three quarters) to bondholders. To date, NMHS' disclosure has been timely and accurate.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 20, 2013);
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' (June 15, 2012).
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
Fitch Ratings, Inc.
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