RPT-Fitch affirms Gwinnett Hospital System, Georgia revs at 'A+'

Fri Oct 4, 2013 3:33pm EDT

Related Topics

NEW YORK, October 04 (Fitch) Fitch Ratings has affirmed its 'A+' rating on the 
approximately $145.2 million outstanding Hospital Authority of Gwinnett County, 
Georgia revenue anticipation certificates (RANs), series 2007A-D listed below, 
issued on behalf of Gwinnett Hospital System, Inc. (Gwinnett):

--$32,395,000 (Gwinnett Hospital System, Inc. Project), series 2007A*;

--$33,640,000 (Gwinnett Hospital System, Inc. Project), series 2007B*;

--$19,040,000 (Gwinnett Hospital System, Inc. Project), series 2007C*;

--$60,150,000 (Gwinnett Hospital System, Inc. Project), series 2007D*.

*The bonds are insured by Assured Guaranty/FSA, whose Insurer Financial Strength
is not rated by Fitch

The Rating Outlook is Stable.

Fitch does not rate the system's 2011 and 2013 series. 

SECURITY

The revenue certificates are secured by gross revenues of Gwinnett Hospital 
System, Inc. as the sole obligated group member. The OG accounted for 96.8% of 
the consolidated 2013 system revenues and 96.6% of the consolidated system 
assets.

KEY RATING DRIVERS

LEADING MARKET SHARE: Gwinnett continues to see increased admissions year over 
year, leading to strong revenue growth, and is the market leader in its primary 
service area with a 37.8% market share, more than twice that of the next 
competitor (13%). Market share was boosted by the launch of an open-heart 
program in 2012.

PRESSURED PROFITABILITY: Gwinnett's profitability has been pressured due to its 
strategic investment in employed physicians. Since the employed physicians are 
outside the OG, profitability for the OG is much higher than the consolidated 
system. In fiscal 2013 (June 30 year end; draft audit), the OG's operating and 
operating EBITDA margin was 5.2% and 13.4%, respectively, compared to the 
consolidated system with 1.7% and 9.9%.

SOLID LIQUIDITY: Liquidity is solid for the rating level, although days cash on 
hand (DCOH) has declined due to growth in expenses driven by a positive volume 
trend reflected in revenue growth (13.3% in 2013). Despite this, all liquidity 
metrics compare favorably to Fitch's 'A' rating category medians.

DEBT BURDEN MODERATED: Gwinnett's debt burden, which had been somewhat elevated 
as a result of investment in facilities in response to what had been robust 
population growth and investment in physician alignment, has now moderated and 
debt service coverage compares favorably to Fitch's 'A' category median.

RATING SENSITIVITIES

MAINTAINING SOLID FINANCIAL PERFORMANCE: Fitch expects Gwinnett's financial 
performance to remain stable and in line with Fitch's A category medians, which 
should be aided by its recent strategic and capital investments.

CREDIT PROFILE

Gwinnett operates a health care system which consists of Gwinnett Medical Center
(353 acute care beds), located in Lawrenceville, GA; Gwinnett Medical 
Center-Duluth (81 acute care beds and 30 acute rehab beds), located in Duluth, 
GA; and an 89-bed skilled nursing facility in Lawrenceville. Gwinnett is the 
only member of the OG, which accounted for 96.8% of the consolidated 2013 system
revenues and 96.6% of the consolidated assets. The only material entity outside 
the OG is the Gwinnett Medical Group, Inc. (GMGI), the employed physician group.
The consolidated system had total revenue of $607 million for the fiscal year 
ended June 30, 2013 (draft audit).

Leading Market Share

Gwinnett was able to increase the market share of its primary service area, 
which includes Gwinnett and Barrow Counties, to 37.8% in 2012 from 33.5% in 
2010, which is more than twice the market share of the next competitor, HCA's 
Emory Eastside, with approximately 13% market share. Gwinnett's admission trend 
has been strong, with admissions increasing every year since 2010, most recently
by 3.7% in fiscal 2013 and 9.3% in fiscal 2012. A major boost was the opening of
the open-heart program in January of 2012. Interventional cardiology was not 
available locally, and patients requiring the treatment were outmigrating to 
Atlanta. During the first six months Gwinnett performed 180 open-heart 
procedures and 380 procedures were performed in fiscal 2013, the first full year
the program was operational. A large cardiovascular group was recruited in 
January 2013, which will further help solidify Gwinnett's presence in 
interventional cardiology in its market. 

Pressured Profitability and Good Liquidity

The OG reported operating income of $33.4 million in fiscal 2012 and $30.5 
million in fiscal 2013. The operating margin of 5.2% and operating EBITDA margin
of 13.4% in 2013 were considerably better than the consolidated system, which 
includes the employed physicians in GMGI. The consolidated system's operating 
income was $10.5 million in fiscal 2013 (1.7% operating margin) compared to 
$20.2 million (3.8% operating margin) in fiscal 2012. GMGI's activity was fairly
insignificant several years ago, but the physician group may at some point be 
brought into the OG given its size and importance to the system. The employed 
physicians are an important factor in the robust utilization trend and the 
strong revenue growth.

Management projects 2014 operating income of $31.9 million for the OG (5.1% 
operating margin) and $8.5 million for the consolidated system, which includes 
GMGI losses of $22.8 million. Anticipating cuts in DSH and UPL payments, 
management is focused on increased productivity and expenses control with the 
help of consultants.

The OG reported cash and unrestricted investments of $396.1 million at June 30, 
2013. While absolute cash remained unchanged since 2011 as Gwinnett invested in 
new programs, such as the open-heart program, physician alignment through 
employment, and facility investments, liquidity relative to expenses declined. 
However, at 276.6 days, DCOH still significantly exceed the 'A' category median 
of 196.3 DCOH. Liquidity relative to debt burden with cushion ratio of 18.9x and
cash equal to 131.2% of debt remain consistent with the 'A' medians of 15.6x and
129.2%, respectively. Liquidity metrics for the consolidated system are similar 
with 261 days cash on hand, 19.1x cushion ratio and 132.9% cash to debt at June 
30, 2013.

Debt Burden Moderated

Gwinnett's debt burden, which was initially elevated, has now moderated. 
Coverage of maximum annual debt service (MADS) by EBITDA for the OG of 4.8x in 
fiscal 2013 exceeds the 'A' category median of 3.8x and MADS as percent of 
revenues at 3.6% is only slightly higher than the 3.1% median. Debt service 
coverage for the consolidated system is also in line with Fitch's 'A' category 
median at 3.9x for fiscal 2013. The organization now has close to 50% of 
long-term debt in fixed-rate mode after the conversion to fixed rate of the 
2007A-D variable-rate certificates. Gwinnett's two variable series were 
converted to direct bank loans; the series 2011 has a February 2016 mandatory 
put date and the series 2013 has a June 2020 mandatory put date. The four swaps,
which were originally used to hedge the series 2007 variable-rate certificates, 
remain outstanding with a notional par of $145 million and a June 30, 2013 
negative mark-to-market valuation of negative $33.4 million. The swap 
counterparties are SunTrust and Wells Fargo which replaced Citi in 2012. The 
swaps are no longer insured, eliminating the risk of potential termination based
on the bond insurer's rating. Collateral posting levels are $15 million and $40 
million for the two counterparties, respectively, and no collateral is being 
posted.

The organization does not have any large capital investment plans for the 
immediate future, with the 2014 capital budget at $43.4 million, equal to 
approximately 120% of budgeted depreciation expense. A women's pavilion 
renovation, which would expand the much needed NICU space and enable Gwinnett to
increase its obstetrical volume, is being considered. 

Disclosure

Gwinnett releases audited financial statements within 150 days of fiscal year 
end and posts quarterly statements within 60 days of the end of each quarter on 
EMMA.

Contact: 

Primary Analyst 

Eva Thein 

Senior Director

+1-212-908-0674

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

Secondary Analysts 

Emily Wadhwani 

Associate Director

+1-312-368-3347

Committee Chairperson

Emily Wong

Senior Director

+1-415-732-5620

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: 
elizabeth.fogerty@fitchratings.com.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: 
here. IN ADDITION, RATING 
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON 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.
FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.