NEW YORK, December 11 (Fitch) Fitch Ratings has affirmed the 'A-' rating on the
following North Brevard County Hospital District bonds issued on behalf of
Parrish Medical Center, Florida (PMC):
--$95.8 million North Brevard County Hospital District (Parrish Medical Center)
refunding revenue bonds, series 2008.
The Rating Outlook has been revised to Negative from Stable.
Bonds are secured by a pledge of net revenues and a fully funded debt service
KEY RATING DRIVERS
POOR PROFITABILITY: In fiscal 2013, PMC recorded a $3.9 million operating loss,
which equated to a negative 2.7% operating margin and 7.7% operating EBITDA
margin, including an $8.2 million operating loss on PMC's employed physician
group (PMG). The operating losses are primarily attributed to a declining
volumes trend at the hospital, as well as on-going physician subsidies. The
Outlook revision to Negative is driven by the PMC's poor profitability that
suppresses debt service coverage to levels not commensurate with the 'A-' rating
level. Failure to improve profitability and coverage metrics will likely lead to
negative rating pressure over the next 12-24 months.
LOW DEBT SERVICE COVERAGE: Pressured profitability combined with a high debt
burden resulted in low maximum annual debt service (MADS) coverage by EBITDA of
1.5x and MADS coverage by operating EBITDA of 1.7x in fiscal 2013, which compare
unfavorably against Fitch's 'A-' category medians of 3.8x and 3.4x respectively.
Fitch views PMC's weak debt service coverage for the 'A-' rating level as a
primary credit concern.
SOLID BALANCE SHEET: At Sept. 30, 2013 (year-end; unaudited), PMC had a total of
$111.4 million in unrestricted cash and investments (a 3% growth since fiscal
year 2011), translating into 299.1 days cash on hand, 17.1x cushion ratio,
and cash to debt of 117%, which nearly met and/or exceeded Fitch's 'A' category
medians of 196 days, 15.6x and 129% respectively. Fitch views PMC's solid
unrestricted liquidity cushion as a primary credit strength.
LEADING MARKET SHARE: PMC maintains a leading market share of 66% in its primary
service area (PSA). The closest competitor is Wuesthoff Hospital (a part of HMA;
rated 'BB-', Rating Watch Negative by Fitch) with a 9% market share. Market
share has remained relatively stable despite a decline in volumes.
EFFECTIVE MANAGEMENT PRACTICES: Fitch believes management's effort to
effectively control costs and maintain high quality will continue to position
PMC favorably as healthcare reform implementation advances. Specifically, CMS
ranked PMC in the top 6% of hospitals in the nation based upon cost and quality
metrics. Additionally, management has led cost containment strategies to address
the recent trend in volume decline,
through which total expenses have decreased and stabilized over the past two
TAXING AUTHORITY ABILITY: PMC is a district hospital and as such has the
authority to levy up to five mills on district property to support hospital
operations. Based on the district's taxable property values, management
estimates the maximum levy would generate approximately $15 million per year in
additional revenue. The ad-valorem tax has not been levied since 1994. Fitch
views PMC's taxing ability as a credit positive.
OPERATIONAL IMPROVEMENTS NEEDED: Fitch will continue to monitor PMC's operating
performance and expects management's initiatives to gain traction within 12-24
months. Fitch believes a reversal of the three year volume decline, narrowing of
the total subsidy incurred by PMC and improvement in profitability is critical
to be consistent with 'A-' rating levels. Failure to demonstrate improvement in
profitability will likely result in a rating downgrade.
Parrish Medical Center is a district hospital with 210 licensed beds (160
staffed beds) located in Titusville, Florida (45 miles east of Orlando, FL). In
fiscal 2013 (unaudited), PMC had total revenues of $158.1 million. PMC covenants
to provide annual and quarterly disclosure through the Municipal Rule Making
Board's EMMA system.
DECLINING VOLUME TREND
Despite having a 66% market share position in its primary service area, Parrish
Medical Center has experienced a three year deterioration in inpatient and
surgical volumes which has pressured profitability. Since fiscal 2010,
inpatient admissions have declined 11.9% and observation stays have fallen
23.7%. More concerning has been the sharp drop in outpatient surgeries from
6,374 in fiscal 2010 to 4,513 in fiscal 2013, a 29.2% decline. However,
management believes with the improving local economy and housing market, volumes
should improve over the next several years.
In fiscal 2013, PMC had an operating loss of $3.9 million, which resulted in a
negative 2.7% operating margin and 7.7% operating EBITDA margin, and compared
unfavorably against Fitch's 'A' category medians of 3.3% and 10.7%,
respectively. Management attributes this deterioration from fiscal 2012
primarily to PMG's $8.2 million operating loss and to declining volumes.
Management expects PMG's operating losses (which are lower per physician than
the industry average) to decrease to $3.8 million by FY2015. Fitch believes it
is imperative for PMC to stymie the physician group's losses to improve system
Excluding PMG's operating losses, PMC achieved a 3% operating margin in fiscal
2013, which is improved from a 0.8% margin in FY2011. The operational
improvement is attributed to cost reduction strategies implemented in fiscal
2012, resulting in total savings of $2.2 million. Additionally, PMC contracted
with a consultant in June 2013 to help mitigate declines in inpatient
admissions, which resulted in a $1.5 million increase in net patient revenue to
date. In fiscal 2014, management is budgeting for additional cost savings of
approximately $2 million and an approximate $4.3 million operating gain,
excluding physician subsidies.
SOLID BALANCE SHEET
At Sept. 30, 2013 (year-end; unaudited), PMC had a total of $111.4 million in
unrestricted cash and investments(a 3% growth since FY2011), translating into
299.1 days cash on hand, 17.1x cushion ratio, and cash to debt of 117%, which
nearly met and/or exceeded Fitch's 'A' category medians of 196 days, 15.6x and
129% respectively. Fitch views PMC's solid unrestricted liquidity cushion as a
primary credit strength.
Additionally, in 2013 PMC revised its investment policy from 100% U.S.
government backed fixed income securities to a more balanced portfolio of
equities and diversified fixed income investments. Management believes this
change will result in improvements in the long-term investment performance.
LOW DEBT SERVICE COVERAGE
PMC's poor profitability combined with a high leverage position resulted in low
MADS coverage by EBITDA of 1.5x and MADS coverage by operating EBITDA of 1.7x in
fiscal 2013, which compared unfavorably against Fitch's 'A-' category medians
of 3.8x and 3.4x respectively. Fitch views PMC's weak debt service coverage for
the 'A-' rating level as a primary credit concern. Failure to improve debt
service coverage metrics to levels more consistent with the 'A-' rating will
likely lead to negative rating movement.
EFFECTIVE MANAGEMENT PRACTICES
Effective management practices including vigilant expense controls and high
priority placed on quality metrics is viewed as a credit positive. Specifically,
CMS ranked PMC number one amongst central Florida hospitals and in the top 6% of
hospitals nationally based upon cost and quality metrics. Overall, Fitch
believes management's effort to effectively control costs and maintain high
quality metrics will position PMC favorably as healthcare reform implementation
In FY2012 and FY2013, management implemented cost-cutting and revenue
improvement initiatives to improve operations. Total operating expenses
(excluding PMG) decreased by 5.7% in FY2012 and by 1.1% in FY2013, while net
patient revenues increased by 2% and 2.4%, respectively. Management's ability to
effectively control expenses, while growing top-line revenue is viewed as a
credit positive and should result in improved operating profitability in the
near to mid-term.
OUTSTANDING DEBT PROFILE
PMC's outstanding debt is all fixed-rate. As of Nov. 29, 2013, PMC had two
outstanding basis swaps with Raymond James, which had a positive mark-to-market
valuation of $1.7 million. Overall, Fitch views PMC's outstanding debt profile
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