Feb 25 - Fitch Ratings has affirmed the 'BBB+' rating on the approximately
$16.6 million outstanding Hannibal Industrial Development Authority (MO) series
2006 revenue bonds issued on behalf of Hannibal Regional Hospital (Hannibal).
The Rating Outlook is Stable.
Debt payments are secured by a pledge of the gross revenues of the obligated
group, a mortgage and a fully funded debt service fund.
KEY RATING DRIVERS
SOLID LIQUIDITY: Hannibal Regional Hospital's balance sheet metrics have
continued to improve since fiscal 2009 as unrestricted cash and investment
totaled $49.1 million at Dec. 31, 2012 (three-month interim), which translates
into a solid 175.5 days cash on hand, 9x cushion ratio and 162.9% cash to debt.
STRONG RELATIONSHIP WITH CLINIC: Hannibal has a strong relationship with
Hannibal Clinic, a large multi-specialty physician group, which accounts for
over 70% of its admissions.
IMPROVED OPERATING PERFORMANCE: Because of expense management, fiscal 2012
operating profitability was improved from the prior year and Hannibal posted a
4.9% operating margin and 12.8% operating EBITDA margin, favorable to the
respective 'BBB' category medians of 1.9% and 8.3%, despite flat volumes and an
increase in bad debt expense.
DECLINING MARKET SHARE: In the last couple of years, market share declined to
39.4% in fiscal 2012 from 44% in fiscal 2010. Management is continuing to work
to regain lost share.
HIGH BUT MANAGEABLE DEBT BURDEN: Maximum annual debt service (MADS) represented
4.8% of total fiscal 2012 revenues, which is above Fitch's 'BBB' category median
of 3.3%. However, MADS coverage by EBITDA was good at 2.9x in fiscal 2012. In
addition, MADS begins to decline starting in fiscal 2013.
WEAK PAYOR MIX: Hannibal's exposure to government payors (approximately 63.8% of
gross revenues in fiscal 2012) coupled with a relatively small revenue base
($112.5 million in total revenue in fiscal 2012) is a concern, as governmental
reimbursement reductions or operational issues could have a significant impact
on financial performance.
MAINTENANCE OF SOLID FINANCIAL PROFILE: The failure to maintain its solid
financial profile and regain market share could result in negative rating
The 'BBB+' rating reflects Hannibal's integrated relationship with Hannibal
Clinic, improving liquidity position and good operating profitability. Credit
concerns include some deterioration to its market share position, its weak payor
mix, and a high debt burden.
After a drop in liquidity in 2009 due to more capital investments than expected
and investment losses due to its significant equity exposure, Hannibal's balance
sheet continues to rebound. At Dec. 31, 2012, unrestricted cash and investments
equaled $49.1 million, which translated to 175.5 days cash on hand and 162.9%
cash to debt, both exceeding the respective 'BBB' category medians of 138.9 days
and 82.7%. Management reduced its equity exposure and the investment portfolio
target asset allocation is now 40% equities and 60% fixed income, versus 65%
equities and 35% fixed income, which Fitch views favorably.
In fiscal 2012, Hannibal's operating performance improved and was more in line
with historical results. Operating margin of 4.9% and operating EBITDA margin of
12.8% in fiscal 2012 were both favorable compared to the respective 'BBB'
category medians of 1.9% and 8.3% and improved from 0.3% and 9.1% in fiscal
2011, but comparable to the 5.3% operating margin and 13.7% operating EBITDA
margin in 2010. This improvement is the result of expense management, including
a reduction in workforce and more efficient labor management. Operating
performance is down through the three-month interim ended Dec. 31, 2012, with
operating margin at 1.9% and operating EBITDA at 9.7%. Management has budgeted a
1% operating margin for fiscal 2013, which management expects to meet or exceed.
Fitch expects performance to remain in line with 'BBB' category medians.
Although Hannibal continues to have a leading inpatient market share in its
primary service area of 39.4% in fiscal 2012, the decline in market share from
44% in 2010 is a concern. Hannibal attributes the loss in market share mostly to
the University of Missouri, Columbia for higher acuity services, and slow
throughput in its emergency department. Management is increasing its recruitment
efforts and focusing on emergency department efficiencies and is working to
regain lost market share. Hannibal is dependent on Hannibal Clinic as they
account for 70% of Hannibal's admissions. However, management indicates that
they maintain a strong working relationship. There are 46 actively admitting
physicians in the Hannibal Clinic and they are primarily loyal to Hannibal as
74% of their admissions are sent to Hannibal.
MADS equals a high 4.8% of fiscal 2012 revenues. This is above the 'BBB'
category median of 3.3%. MADS of $5.5 million occurred in fiscal 2012 and debt
service declines to $5.4 million in fiscal 2013 and $4.9 million in fiscal 2014.
Debt service coverage of MADS by EBITDA was solid at 2.9x, which is in line with
the 'BBB' category median of 2.8x and an improvement from 1.9x in fiscal 2011.
Total outstanding long-term debt as of Dec. 31, 2012 was $30.1 million ($23.1
million bonds and $7 million capital lease) and is 100% fixed rate. There are no
swaps outstanding. Hannibal does not have any major debt plans in the near term
and future capital investments are mainly for information -technology as
Hannibal expects to meet 'meaningful use by 2013. Hannibal's capital budget for
fiscal 2013 totals $5.3 million, of which $2.8 million will be funded from cash
flow and $2.5 million from capital lease financing.
The Stable Outlook reflects Fitch's expectation that Hannibal will continue to
maintain a financial profile in line with the 'BBB' category and that its
declining market share trend will reverse.
Hannibal is a 105-bed community hospital based in Hannibal, MO, located in
northeast Missouri approximately 120 miles north of St. Louis. Total operating
revenue in fiscal 2012 was $112.5 million. Hannibal covenants to provide annual
continuing disclosure no later than 150 days after the end of fiscal year and
quarterly disclosure no later than 60 days after each quarter's end. Annual
disclosure is posted to EMMA and includes audited financial statements, payor
mix, and utilization statistics. Hannibal does not post quarterly disclosure to
the EMMA, which Fitch views negatively.
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' (June 12, 2012);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (July 12, 2012).
Applicable Criteria and Related Research
Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria