Dec 18 - Fitch Ratings has assigned an 'A-' rating to the expected issuance
of the following city of Manhattan, Kansas hospital bonds issued on behalf of
Mercy Regional Health Center (MRHC):
--$28,000,000 refunding revenue bonds series 2013 (Mercy Regional Health Center,
Proceeds from the series 2013 bonds will be used to refund MRHC's 2001 bonds and
pay costs of issuance. The 2013 bonds are expected to price the week of January
7 via negotiation.
The Rating Outlook is Stable.
The bonds will be secured by a pledge of gross revenues of the obligated group,
security of the main hospital campus through a lease arrangement with the city
of Manhattan, and a funded debt service reserve.
KEY RATING DRIVERS
IMPROVED OPERATING PERFORMANCE: After a negative operating margin in fiscal 2008
(Sept. 30 year-end), Mercy Regional Health Center's (Mercy, or MHRC) operating
performance has been consistent with the rating category for the past four
fiscal years. Operating improvements were driven by a change in leadership at
Mercy and additional oversight provided by Via Christi Health System (rev bonds
rated 'A+', Stable Outlook by Fitch).
VIA CHRISTI AFFILIATION A CREDIT STRENGTH: MRHC's affiliation with Via Christi,
which owns 50% of Mercy and has a management contract with MRHC, provides Mercy
with the resources of a much larger system in such areas as information
technology, group purchasing, and risk management. Access to these resources
serves to mitigate concerns about Mercy's smaller revenue base and bed size for
the rating category.
LEADING MARKET SHARE: Mercy is the only full-service hospital in Manhattan, KS,
and maintains a leading market share of 27% in a larger nine-county primary and
MANAGEABLE CAPITAL NEEDS: Mercy completed a major campus expansion in 2004, so
has manageable capital needs moving forward. The largest current project is the
final consolidation of services from Mercy's other campus to Mercy, which
includes the renovation of the North Tower at Mercy. This project will be
largely funded by the sale of MRHC's other hospital campus, which is expected to
be finalized within the next six months.
MODERATE DEBT LEVEL: With the refinancing of its 2001 debt, Mercy's maximum
annual debt service (MADS) falls by approximately $1 million to $3.4 million.
Coverage of the pro forma MADS was a very solid 4.9x in fiscal 2012 (unaudited).
MADS occurs in 2014 and then will drop to approximately $2.7 million a year for
the life of the bonds.
LIQUIDITY A STRENGTH: With 204.7 days cash on hand, a 14x pro forma cushion
ratio, and 129.6% cash to debt as of Sept. 31, 2012, MRHC liquidity metrics
compare well with category medians and liquidity has grown every year through
the historical period.
The 'A-' rating is supported by an overall financial profile including operating
performance, liquidity, and debt service coverage that is consistent with the
rating category. Further support for the 'A-' rating is provided by MRHC's
affiliation with Via Christi. Through the affiliation, MRHC has access to the
resources of a much larger system, as well as management oversight from Via
Christi (the CEO of MRHC is a Via Christi employee). The affiliation mitigates
much of the concern related to MRHC's smaller revenue and bed size for the
Over the last four audited years, MRHC operating EBITDA margin has averaged
13.5%, above Fitch's 'A' category median of 9.8%. Its operating margin has
averaged 4.1% over that time as well, also above the category median. Financial
results are based on consolidated results. The largest entity outside the
obligated group (OG) is a critical access hospital, Wamego Hospital Association
(WHA), located in Wamego, Kansas, of which MRHC owns 51%. The OG represents
approximately 88.7% of the consolidated operating revenues and approximately
90.3% of consolidated total assets for the period ending Sept. 30, 2012.
MRHC had a negative operating margin in fiscal 2008 but a new CEO, who started
in June 2009, has turned operations around, along with oversight and guidance
from Via Christi. Expenses fell from fiscal 2008 to 2009 and have remained
fairly flat over the last four audited years. In addition, strategies are in
place to increase revenue through expanding service lines and physician
Strong financial performance is also supported by MRHC's positive competitive
position. MRHC has a dominant market share in Manhattan, as it is the only acute
care hospital in the city, and maintains a leading 27% market share in a larger
nine-county service area. While there is competition, it is manageable and MRHC
is positioned to compete. MRHC added seven physicians in the last year, will
purchase and begin operating a da vinci robot, and is expanding its cardiology
services, opening up a second cath lab on its main campus, which should further
its competitive position regionally.
MRHC's liquidity has grown over the last four audited years, with unrestricted
cash and investments increasing 47% over that time to $48.8 million as of Sept.
30, 2012. This equates to 204.7 days cash on hand, a 14x pro forma cushion
ratio, and 129.6% cash to debt, all of which are favorable to Fitch's 'A' median
category ratios. All of MRHC's debt is fixed, adding additional stability to its
Pro forma MADS of $3.4 million occurs in 2014 and then will drop to
approximately $2.7 million a year for the life of the bonds. Coverage of the pro
forma MADS was a very solid 4.9x in fiscal 2012 unaudited. Pro forma MADS as a
percentage of revenue of 3.3% as of Sept. 30, 2012 was slightly elevated but
Fitch expects MRHC to lower that figure over time.
Fitch's largest credit concerns are MRHC's small revenue base for the rating
category (MRHC's revenue size of $105.5 million on a consolidated basis in
fiscal 2012 makes it one of the smallest Fitch rated 'A' category hospitals) and
execution on the closing down of MRHC's other campus and renovation of the North
Tower on its main campus, where some of these services will be relocated. MRHC's
relationship with Via Christi as well as its strong market position mitigates
some of the concern over MRHC's small revenue base. The management contract with
Via Christi is in the second year of a 10-year term.
The renovation of the North Tower is estimated to cost $17 million and will be
funded by the sale of MRHC's second campus (which has been mostly outpatient
services) and cash flow. MRHC is expected to close on the sale of the building
within the next six months, but execution risk does exist until the sale is
finalized. Services planned for the renovated North Tower include Cardiac Rehab,
Outpatient Registration, IV Express unit, and Endoscopy. Additional space will
be shelled in for potential further growth. The consolidation of the second
campus into MRHC's main campus should be financially positive over the medium
term, enabling MRHC to reduce expenses and grow services.
Overall MRHC's campus is in very good condition. A major campus reconfiguration
project was completed in 2008, which included a new inpatient tower, intensive
care unit and emergency department. Once the North Tower renovation is
completed, MRHC should have minimal capital needs, which would be an additional
The Stable Outlook is based on Fitch's expectation that MRHC's financial profile
will remain unchanged over the next two years.
MRHC owns and operates a 150-licensed bed hospital and other health care
facilities in Manhattan, KS. MRHC's main campus is operated under a lease from
the city of Manhattan. The length of the lease is tied to the amortization of
the bonds and the lease payment is composed mostly of the bond payments.
Disclosure will be made within 120 days of fiscal year end and within 45 days of
the end of the first three quarters and 60 days after the end of the fourth
quarter to the Municipal Securities Rulemaking Board's EMMA system.
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.
In addition to the sources of information identified in the 'Revenue-Supported
Rating Criteria', this action was informed by US Bank as underwriter.
Applicable Criteria and Related Research:
--Rating Criteria' (June 12, 2012);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (July 23, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria