BRIEF-RAPIER REJECTS TWO FINANCING OFFERS SUPERIOR TO THE ENTRENCHING PRIVATE PLACEMENT
* RAPIER REJECTS TWO FINANCING OFFERS SUPERIOR TO THE ENTRENCHING PRIVATE PLACEMENT
Nov 20 - Fitch Ratings has affirmed the 'BBB' rating on the following bonds issued by the Sharon Regional Health System Authority (PA) on behalf of Sharon Regional Health System (SRHS): --$25.7 million series 1998 revenue bonds. The Rating Outlook is revised to Negative from Stable. SECURITY Bonds are secured by a pledge of gross revenues, property, and debt service reserve fund. KEY RATING DRIVERS DETERIORATION IN FINANCIAL PERFORMANCE: The revision in Outlook to Negative from Stable reflects a decline in SRHS's operating performance due mainly to non-recurring items; however, a change in leadership also adds a level of uncertainty. WEAKENED PROFITABILITY IN FISCAL 2012: Operating profitability materially weakened in fiscal 2012 (June 30 year-end) and has continued through the first quarter of fiscal 2013 due to a confluence of factors including increased expenses, reduced revenue from the reclassification of admissions to observation stays, and softened volumes. STABLE MARKET POSITION: SRHS has maintained a stable market share in its primary service area, averaging 46.5% since fiscal 2007, despite facing significant competition from University of Pittsburgh Medical Center (UPMC, revenue bonds rated 'AA-' by Fitch). SOLID LIQUIDITY: Liquidity metrics are solid relative to SRHS's debt burden with 8.7x cushion ratio and 114.4% cash to debt, and provides cushion for payment of debt service, but remain weak relative to expenses with 97.1 days cash on hand. LOW DEBT BURDEN: SRHS's low debt burden has historically allowed for solid maximum annual debt service (MADS) coverage, averaging 2.7x between fiscal years 2007 and 2011, despite light profitability levels. However, a material decrease in operating profitability decreased MADS coverage to 0.9x in fiscal 2012. Per SRHS's covenant calculation, MADS coverage equaled 2.2x in fiscal 2012. WHAT COULD TRIGGER A RATING ACTION FAILURE TO IMPROVE PROFITABILITY: Negative rating movement would likely occur if SRHS fails to improve operating profitability in the near term to a level which provides adequate cash flow to cover MADS at a level consistent with the 'BBB' category. CREDIT PROFILE The affirmation of the 'BBB' rating reflects SRHS's stable market share, adequate liquidity and low debt burden. Fitch's primary credit concern is a material weakening in fiscal 2012 operating profitability; however, Fitch expects profitability to improve in the near term. Liquidity remains adequate for the rating level with $39.7 million in unrestricted cash and investments at Sept. 30, 2012. Unrestricted liquidity equates to a light 97.1 days cash on hand relative to Fitch's 'BBB' category median of 138.9 days. While liquidity is weak relative to operating expenses, liquidity is solid relative to SRHS's debt burden. Cushion ratio and cash to debt equaled 8.7x and 114.4%, respectively, relative to Fitch's 'BBB' category medians of 9.4x and 82.7%. SRHS has consistently held the leading market share in its service area, averaging 46.5% since fiscal 2007. Market share increased to 48.9% in fiscal 2011 despite facing significant competition from UPMC. UPMC maintains a strong market share of approximately 40% in the service area. Management continues significant physician alignment strategies in order to prevent out migration of select services and increase SRHS's presence in key clinical areas. SRHS's light debt burden has historically enabled solid coverage of debt service despite low profitability levels. MADS equaled only 2.4% of operating revenues in fiscal 2012. Given the low burden, MADS coverage averaged 2.7x EBITDA between fiscal years 2007 and 2011. However, a material decline in operating profitability caused MADS coverage to decline to 0.9x by EBITDA in fiscal 2012 from 2.7x in fiscal 2011. This level is no longer consistent with Fitch's 'BBB' category median of 2.8x. Fitch notes that per SRHS's covenant calculation, MADS coverage equaled 2.2x in fiscal 2012. Operating profitability declined materially in fiscal 2012 due to a confluence of factors. Operating margin decreased to negative 4.3% in fiscal 2012 from 0.5% in fiscal 2011. The decline in operating performance reflected increased operating expenses (many of which are expected to be non-recurring), increased bad debt expense, increased observation stays and softened volumes. Operating expenses exceeded the fiscal 2012 budget by approximately $10.9 million. Key items included increased employee benefits expense due to high acuity case utilization, increased bad debt expense as well as increased consulting and legal fees. Of the $10.9 million in expense variance to budget, only approximately $3.3 million are expected to be recurring expenses. Inpatient volumes declined in fiscal 2012 and the interim period due to a material increase in observation stays, the departure of three key physicians for personal reasons and a slowdown in physician productivity related to the implementation of electronic health records. Additionally, volumes were negatively impacted by the medical staff's dissatisfaction with strategic changes introduced by management in fiscal 2012. Management reported that volumes began to rebound in October 2012. Management has identified over $8 million in expense reductions to offset the soft volumes. Expense reductions include renegotiated purchased services, supply chain savings and a decrease in staff. The entire $8 million in expense savings is expected to be realized in fiscal 2013. Operating expenses decreased $4.8 million in the three-month interim period ending Sept. 30, 2012 relative to the interim period ending Sept. 30, 2011. Management is also working on revenue enhancement projects to improve operating performance including initiatives to decrease bad debt and to ensure that observation stays are being recorded correctly. However, revenue was also down through the interim period and first-quarter performance is still weak with a negative 3.3% operating margin (negative $1.3 million operating income). The fiscal 2013 budget includes operating income of $3.4 million (1.8% operating margin). However, Fitch expects operating profitability to improve to at least break-even levels in fiscal 2013. Additionally, the CEO, who assumed the position in September 2011, resigned in September 2012, and the COO was named as the new CEO effective Sept. 24, 2012. The new CEO joined SRHS in 1999 as the chief information officer and was subsequently promoted to COO. Fitch views the new CEO's tenure and experience at SRHS positively and management reports that the initial medical staff feedback has been positive. However, the change in leadership adds a measure of uncertainty. The Negative Outlook reflects the material decline in operating profitability in fiscal 2012. Failure to improve operating profitability in the near term to a level which provides adequate cash flow to cover MADS at a level consistent with the 'BBB' category will result in negative rating pressure. Sharon Regional Health System operates a 241 licensed-bed acute care hospital located approximately 80 miles north of Pittsburgh. Total revenues equaled $187.4 million in fiscal 2012. SRHS covenants to provide annual audited financials within 150 days of fiscal year-end. SRHS does not covenant to disclose quarterly financial statements, but provides bondholders with quarterly disclosure upon request. Fitch views the lack of quarterly disclosure negatively. Annual disclosure is posted to the Municipal Securities Rulemaking Board's EMMA website. 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. 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 2003 Median Ratios for Nonprofit Hospitals and Health Care Systems Nonprofit Hospitals and Health Systems Rating Criteria
* RAPIER REJECTS TWO FINANCING OFFERS SUPERIOR TO THE ENTRENCHING PRIVATE PLACEMENT
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