February 27, 2013 / 7:26 PM / 4 years ago

TEXT - Fitch affirms Monongalia Health Systems, WV revs

9 Min Read

Feb 27 - Fitch Ratings has affirmed its 'A-' rating on the following series
of bonds issued on behalf of Monongalia Health System, WV (Mon 
Health):

--$21.1 million Monongalia County Building Commission series 2011
--$34.5 Monongalia County Building Commission series 2008A;
--$13.5 Monongalia Health System Series 2008B;
--$57.5 Monongalia County Building Commission series 2005A.

The Rating Outlook is Stable. 

SECURITY 

The bonds are secured by a pledge of gross revenues and a mortgage pledge of the
obligated group, which accounted for approximately 104% of system assets and 
100% of system revenues in fiscal 2012.  For purposes of this report, Fitch 
reports on the results of the consolidated system.

KEY RATING DRIVERS

STRONG FINANCIAL RESULTS AND COVERAGE: The affirmation of the 'A-' and Stable 
Outlook is based on Mon Health's strong financial performance over the last two 
fiscal years and through the seven-month period ended Jan. 31, 2013 (the interim
period) with operating and operating EBITDA margins and maximum annual debt 
service coverage (MADS) exceeding Fitch's 'A' category medians.  

SOLID MARKET POSITION: Mon Health has a solid market position of approximately 
35%-36% in an area that has been only minimally affected by U.S. recessionary 
pressures.

STILL ELEVATED DEBT LOAD: Mon Health's leverage ratios, while still somewhat 
elevated with MADS at 3.7% of revenues and debt to capitalization at 53.5%, have
been consistently improving.  Having completed a major construction and 
renovation project, the organization is not planning to issue additional debt in
the near term, which should further help to moderate Mon Health's debt load.

IMPROVED LIQUIDITY: The system's liquidity relative to expenses is solid with 
$118 million of unrestricted cash and investments, translating to 210 days cash 
on hand (DCOH) at the interim period, significantly higher than the category 
median.  Cash to debt at 93% is somewhat lower than the category median, but is 
vastly improved from the 55% level four years ago.

RATING SENSITIVITY

MODERATION OF DEBT LOAD: Continued strong operating performance and a further 
moderation of the debt load over the next couple of years would likely lead to 
positive rating pressure.

CREDIT PROFILE

The affirmation of the 'A-' rating is supported by the continuation of solid 
operating performance, exceeding Fitch's 'A' category medians, which has been 
maintained through the seven-month interim period, strong coverage of debt 
service and stable market share.  Following the December 2009 completion of a 
major project, which included the construction of a new patient tower and 
renovation of certain inpatient areas, resulting in an all-private-room bed 
complement, the organization faces modest capital needs.  This should result in 
moderation of the debt load, which is the only area where metrics are below the 
'A' category medians.

Mon Health ended the last two fiscal years with very strong operating results. 
Fiscal 2012 (year end June 30) ended with operating income of $14 million, for 
an operating margin of 6.2% and operating EBITDA margin of 14.9%.  For fiscal 
2011 Mon Health reported operating income of $11.6 million, equal to operating 
margin of 5.4% and operating EBITDA margin of 14.6%. Both the operating and the 
operating EBITDA margins compare favorably to Fitch's 'A' category medians of 
2.8% and 9.8%, respectively. Strong operating performance has been due to good 
revenue growth and capture of cardiac cases in the service area. Through the 
seven-month interim period ended Jan. 31, 2013, operating performance was 
maintained, with operating income of $7.1 million, equal to an operating margin 
of 5.4% and operating EBITDA margin of 14%.  The interim period operating income
includes $2.3 million of meaningful use monies from the federal stimulus, which 
had been included in the budget. Based on the interim performance, it is likely 
that Mon Health will exceed its consolidated system 2013 operating budget of 
$11.2 million (4.9% operating margin). 

Management reports that there have been no shifts in market share, which is 
estimated between 35%-36% of the primary service area.  The main competitor in 
the service area is West Virginia University Hospitals (WVUH), which maintains a
closed medical staff.  In Monongalia County, the market share is roughly split 
between the two providers. While Mon Health's admissions fell by approximately 
10% last year, a trend which continues through the interim period, cardio 
thoracic surgery volumes have been robust, reported to be the highest to date.  
Management reports that Mon Health performs higher volumes of high-end cardiac 
surgery than WVUH.  Mon Health performed 234 open-heart surgeries through the 
interim period, exceeding budget, and expects to perform potentially 400 
open-heart procedures this fiscal year based on the strong year-to-date volumes.
Mon Health is in the process of launching a trans-aortic valve replacement 
program (TAVR), the only such program in thestate, which is expected to further 
increase cardiac volumes.  TAVR is a minimally invasive procedure intended for 
patients who could not tolerate the stress of open-heart surgery. Mon Health is 
building a hybrid operating room for advanced CT procedures ($2.7 million), 
which is part of its capital budget to be funded from cash flow.  

Beginning in 2009, Mon Health's liquidity improved significantly. The $118 
million of unrestricted cash and investments at Jan. 31, 2013 translates to 210 
days cash on hand (DCOH) and 13.9x cushion ratio (based on MADS of $8.5 
million), both comparable to the 'A' category medians of 191 DCOH and 16.3x 
cushion ratio.  Cash to debt at 93%, though significantly improved from 55% in 
fiscal 2009, lags slightly behind the 'A' category median of 116.4%, but will 
likely improve as Mon Health has completed its major capital projects and should
now be able to increase its liquidity based on its strong operating cash flow. 

Fitch's main credit concern is the still slightly elevated debt burden and the 
continued need to make large contributions to a now frozen defined benefit 
pension plan, estimated at $8 million annually. The significant investment in 
the physical plant, as well as the $14.5 million bond issue in 2008 to fund a 
portion of the pension liabilities, resulted in an elevated debt burden, but the
debt metrics are slowly moderating and the updated facility will require only 
modest capital investment over the near term. Coverage of MADS by EBITDA was a 
solid 4.5x in fiscal 2012 and is at 4.2x at the interim period, comparing well 
to the category median of 4.1x. MADS as percent of revenues, at 3.7% at the 
interim period, is still higher than the 'A' median of 2.8%, but is likely to 
moderate based on the absence of debt plans in the near to medium term. 

In March 2012, Mon Health elected to convert the series 2008A and 2008B bonds to
a bank-rate mode, which eliminated the need for the LOCs that had previously 
provided liquidity for the two series.  The bonds were purchased by JPMorgan and
the rate is at an indexed floating rate for an initial term of seven years. The 
bonds retain their original amortization and maturity.  Total outstanding debt 
is approximately $127 million and the current debt structure is relatively 
conservative with 62% of debt in fixed-rate mode. Mon Health has three swaps 
outstanding with a notional par of $51.7 million and mark to market of negative 
$14.9 million at Dec. 31, 2012.  There are no collateral posting requirements on
the swaps.

The Stable Outlook reflects Fitch's expectation that Mon Health will be able to 
maintain its solid financial and operating profile, which will make it possible 
to continue to fund its pension liabilities and further moderate its debt load. 

Monongalia Health System, headquartered in Morgantown, West Virginia, consists 
of a 189 staffed bed acute care hospital, Mon Elder Services (90 independent 
living units and 40 assisted living units), an ambulance company and a 
foundation, and is an owner/part owner of several entities, including a durable 
medical equipment company, a home health agency, a rehabilitation facility, and 
an ophthalmology surgery center. The consolidated system had revenues of $224 
million in fiscal 2012. Mon Health covenants to disclose annual audited 
financial statements within 120 days of the end of its fiscal year and quarterly
financial statements within 45 days of the end of the quarter (60 days after the
end of the last quarter).

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