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 credit risk. 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. CREDIT PROFILE 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. OUTLOOK 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. DEBT PROFILE 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. ORGANIZATIONAL OVERVIEW 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. DISCLOSURE 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.