Nov 21 - Fitch Ratings has affirmed the 'A-' rating on the following Butler
Health System (BHS) bonds issued by Butler County Hospital Authority:
--$75.9 million series 2009B.
The Rating Outlook is Stable.
SECURITY: The bonds are secured by a pledge of gross revenues, a lien of a
mortgage granted by the credit group, and a debt service reserve fund.
KEY RATING DRIVERS
LEADING MARKET POSITION: Butler Health System has a dominant market share of 65%
in its primary service area (PSA), with its closest competitor having a 5.7%
share. BHS' leading market position is slightly improved from the prior year as
the organization has been effective in expanding its outpatient service
footprint in the total service area.
MIXED FINANCIAL PROFILE: BHS' financial profile is characterized by improving
balance sheet metrics, consistent operating EBITDA profitability, and relatively
low debt service coverage.
COMPETITIVE MARKETPLACE: Located in Butler County, PA, which is approximately 30
miles north of Pittsburgh, PA, BHS faces strong competition from University of
Pittsburgh Medical Center (UPMC; revenue bonds rated 'AA-'; Stable Outlook by
Fitch) and West Penn Allegheny Health System (WPAHS; revenue bonds rated 'CCC').
Fitch views the presence of two large competitors in its service area as a
HIGH DEBT BURDEN: Maximum annual debt service (MADS) of approximately $10
million represented 4.0% of total revenues in fiscal 2012 (June 30; audited),
which compared negatively against Fitch's 'A' category median of 2.8% and was
high for the rating level.
LIMITED CAPITAL NEEDS: With all new inpatient facility construction complete,
BHS has no large capital plans over the medium term. Over the next three fiscal
years, management intends to spend approximately $23 million on capital, which
Fitch views as manageable.
AFFIRMATION OF 'A-' RATING
The rating affirmation of 'A-' reflects BHS' dominant and leading market
position in the PSA, growing utilization trends resulting from management's
effective strategy of expanding outpatient services, consistent operating EBITDA
profitability, and limited capital needs. Credit concerns include BHS' elevated
debt burden and competitive marketplace.
Despite the Pittsburgh market generally seeing lower patient volume trends, BHS
has been able to grow certain service lines such as cardiology and orthopedics
in part due to management's effective physician alignment strategy.
Additionally, BHS has opened and operates a number of outpatient care sites in
its service area, which is another focus of management that has supported
outpatient utilization growth. Improved utilization has led to slight market
share gain as well as consistent profitability highlighted by earned operating
EBITDA of $25.9 million in fiscal 2012 (10.2% operating EBITDA margin). Over the
past four fiscal years, BHS has averaged a 9.8% operating EBITDA margin, which
is identical to Fitch's 'A' category median. Overall, Fitch views the system's
consistent profitability trend favorably.
As of June 30, 2012, BHS had $109.6 million in unrestricted cash and
investments, which equated to 177.4 days cash on hand, 10.4x cushion ratio, and
81.7% cash to debt. BHS' absolute unrestricted cash balance is improved from
fiscal 2010's $90 million. Although BHS' unrestricted cash metrics are light for
the rating category, Fitch views the improved trend favorably and expects
further improvement with limited capital plans.
In 2012, BHS had MADS debt service coverage by EBITDA of 2.7x, which is
relatively low for the rating level and compared unfavorably against Fitch's
median of 4.1x. However, with no plans for additional debt, Fitch expects BHS'
debt burden to moderate and debt service coverage metrics to improve.
Competition in the greater Pittsburgh area continues to be a primary credit
concern, as two strong competitors operate in the service area; UPMC and WPAHS.
Although BHS has a leading market share in its PSA, the presence of UPMC and
WPAHS along with other local providers, demonstrates the need for BHS to
maintain effective physician alignment strategies and clinical affiliations.
The Stable Outlook reflects Fitch's expectation that BHS will maintain the
leading and dominant market share in its PSA and record consistent profitably,
which should support adequate debt service coverage metrics.
BHS' debt portfolio is approximately 57% fixed-rate and 43% variable-rate. The
system's series 2010A and 2009A bonds are variable-rate privately placed bonds
with BB&T (rated 'A+/F1'; Stable Outlook). The organization has no outstanding
swaps nor any additional debt plans.
Located in Butler County, PA, Butler Health System is a 307 licensed-bed large
community hospital system that offers select higher-end services in Western
Pennsylvania. In total, BHS has 28 outpatient care sites in its network,
including four urgent care clinics. In fiscal 2012, BHS had approximately $254.2
million in total revenue.
BHS has covenanted to provide financial information to the MSRB's EMMA system.
Quarterly information consists of financial statements and select utilization
data. Management was candid and timely in its responses to Fitch during the
credit review process.