Feb 15 - Fitch Ratings has affirmed the 'A-' underlying rating on the
following bonds issued by the Health and Educational Facilities Authority of the
State of Missouri on behalf of Bethesda Health Group, Inc.
--$75,425,000 variable rate demand health facilities revenue bonds, series 2009.
The Rating Outlook is revised to Negative from Stable.
The series 2009 bonds are supported by an irrevocable letter of credit (LOC)
from U.S. Bank (rated 'AA-/F1+'; Outlook Stable by Fitch). If there is a draw on
the LOC, the term out provision would be two years beginning 367 days after the
Bonds are secured by a LOC from U.S. Bank and a pledge of unrestricted
KEY RATING DRIVERS
Aggressive Debt Profile: The outlook revision to Negative from Stable reflects
Fitch's concerns over BHG's low occupancy levels in its skilled nursing
facilities (SNF), flat revenue trend, as well as its aggressive debt profile,
with all outstanding debt in variable-rate demand bonds (VRDBs). Potential put
risk is heightened given that the U.S. Bank LOC is set to expire in December
2013, and cash to puttable debt is only 90.6%.
Flat Revenue Trend: Total operating revenues have been flat over the last four
fiscal years, with net resident service revenues around $60 million annually.
Fiscal 2012 was a particularly challenging year, due to continued occupancy
declines in both independent living units (ILU) and SNF, negative effects from
2011 Medicare rate cuts, and losses at the now closed Charless Home community.
Recent Rebound in ILU Occupancy: Following three years of declines due to the
service area's softened economic environment, ILU occupancy rebounded through
the 6-month interim period ended Dec. 31, 2012. Occupancy increased 9%-20% in
the last twelve months across each of its five ILU campuses. However, SNF
occupancy remains low at 78%, down from 85% in 2010.
Developing Strategic Relationships: BHG's long-term care capacity positions it
well to benefit from the goals under healthcare reform. Management is in
discussions with local acute care providers to coordinate and provide long-term
care to patients, which should help improve SNF census and drive revenue growth.
Recovering Financial Performance: Profitability metrics recovered somewhat
through the interim period with operating ratio of 97.8% and net operating
margin of 3.5% versus 101.1% and 0.5% the prior year period. Debt metrics also
improved with MADS coverage of 3.3x, revenue only coverage of 2.0x, and MADS as
a percentage of total revenue of 7.7%, all stronger than rating category
medians. Sustaining this momentum through the 2013 fiscal year should bring
BHG's overall financial profile closer in line with 'A' category medians and is
necessary to maintain the current rating.
Addressing LOC expiration: Fitch recognizes that BHG has engaged in preliminary
discussions with credit providers, and has some time to address the potential
put. Fitch will monitor BHG's progress in replacing the credit provider or
refinancing the 2009 bonds, and the failure to execute on this would likely lead
to negative rating pressure.
Revenue Growth Improvement Needed: Top-line revenue growth is necessary as many
expense reduction initiatives are already in effect. Failure to return to
historical profitability levels in the next year would lead to negative rating
BHG operates five independent living facilities, one assisted living facility
and three skilled nursing facilities in the St. Louis, MO area with a total of
557 ILUs, 18 assisted living units (ALU), and 680 SNF beds. Total revenues in
fiscal 2012 were $63.2 million.
The rating is supported by BHG's size and diversity of its communities,
significant improvement in ILU occupancy through the interim period, and
historically solid revenue only MADS coverage. Key credit concerns include
potential put risk related to its series 2009 VRDBs and recent challenges in
Operating revenues have been flat over the last four fiscal years with net
resident service revenues around $60 million annually. Revenue was impacted in
fiscal 2012 by several factors including losses at the now closed Charless Home,
11.1% Medicare cuts that went into effect in October 2011, and occupancy
declines across both ILU and SNF facilities. In 2006, BHG began operating the
Charless Home at the request of the Charless Foundation, which consisted of 72
ILUs, 16 ALUs, and 30 SNF beds. Due to ongoing financial constraints, the two
organizations decided to close the facility effective June 30, 2012. In fiscal
2012, ILU and SNF occupancies at the Charless Home were below 50%, producing
operating losses of $1.1 million, a negative 1.7% impact on operating margin.
Further, BHG experienced a negative impact of $2 million in fiscal 2012 from
Medicare cuts. Combined with census declines, operating income from SNF
operations declined $3.4 million from 2011 to 2012, which resulted in
overallpoor profitability for the organization.
Management has made an effort to recover profitability, implementing various
cost reduction initiatives as well as enhancing ILU sales and marketing
approach. Supported by revamped marketing efforts and recovering real estate
market, ILU occupancy improved dramatically through the 6-month interim period.
Across the five facilities, occupancy increased 13.8% to 85.8% from 72.0% the
prior year. In addition, rental contracts are offered as another marketing
initiative. There were 39% total rental contracts in YTD 2013 compared to 43% in
SNF occupancy continues to be challenged with 78% occupancy through the interim
period, and census below budgeted levels. Management is actively utilizing
strategies to enhance its long-term care census, such as better marketing of
BHG's services to existing residents and engaging acute care providers in the
region. Fitch believes BHG is well positioned to coordinate care with local
hospitals under healthcare reform, which will be aided by its EHR
implementation. Recently, BHG was named the preferred provider of a local
Operating performance weakened in fiscal 2012 with operating ratio of 102.4% and
net operating margin of 0.5% from 95.2% and 7.9% in fiscal 2011 compared to
Fitch's 'A' category medians of 95.2% and 7.6%. Supported by strong ILU sales
through the interim period and expense management, profitability recovered with
an operating ratio of 97.8% and net operating margin of 3.5%. While
profitability still lags the 'A' category medians, Fitch expects this level of
performance to be sustained.
Unrestricted cash and investments totaled $68.4 million at Dec. 31, 2012,
equating to 406.0 days cash on hand, 90.6% cash to debt, and 13.2x cushion
ratio. While liquidity metrics are adequate for the rating category, Fitch is
concerned about potential risks related to $75.4 million of VRDBs supported by
an LOC. Management has indicated that BHG is already in preliminary discussions
with various credit providers in preparations for the upcoming LOC expiration in
Dec. 2013. Potential options under considerations include replacing the LOC or
refinancing the outstanding bonds. While a put event is viewed as unlikely,
timely replacement of LOC or a refinancing is critical as cash to debt is weak
BHG has three outstanding fixed-payor swaps with a notional amount of $48.6
million. As of Dec. 31, 2012, the mark-to-market valuation was negative $15.5
million; however, BHG has not had to post any collateral and would only have to
do so if the underlying credit rating dropped below 'BBB-'. Management has
indicated BHG does not have any plans for additional debt.
The Outlook revision to Negative from Stable reflects Fitch's concerns over
BHG's financial flexibility to meet potential put risks related to its variable
rate debt. Additionally, failure to return to historical profitability levels
within the next year would likely result in negative rating pressure.
BHG does not covenant to provide continuing disclosure to bondholders unless the
bonds are converted to a fixed-rate mode, which is viewed negatively by Fitch.
However, management has been candid and timely in producing information for
Fitch during the ratings process.