Fitch Rates Boone Hospital Center's (MO) Series 2016 Bonds 'A'; Outlook Revised to Negative
OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to the following bonds expected to be issued by Boone County (MO) (the county) on behalf of Boone Hospital Center (BHC):
--$78,185,000 hospital revenue refunding bonds, series 2016.
Additionally, Fitch has affirmed the 'A' rating on approximately $93 million of revenue bonds issued by the county on behalf of BHC.
The series 2016 bonds will be issued as tax-exempt fixed-rate bonds. Bond proceeds will be used to refund BHC's outstanding series 2008 bonds and to pay costs of issuance. The series 2016 bonds are expected to price the week of June 27 through negotiation.
The Rating Outlook is revised to Negative from Stable.
The bonds are secured by a pledge of the net income and revenues derived and collected by the Board of Trustees of Boone County Hospital (BOT, obligor on the bonds) from the operation of the hospital facilities. During the term of the lease, the bonds are not payable from the hospital's net revenues, but from the lease payments received by BOT from BHC.
KEY RATING DRIVERS
WEAKENED OPERATING PROFITABILITY: The Negative Outlook reflects BHC's weakened operating profitability in fiscal 2015 which materially compressed coverage metrics. Operating EBITDA margin decreased to 7% in fiscal 2015 from 14.2% in fiscal 2014.
AFFILIATION WITH BJC: BHC is leased by the BOT to a subsidiary of BJC Health System (BJC). The hospital benefits from BJC's managerial expertise and strategic support.
LEASE STRUCTURE RISK: The hospital lease does not extend through the maturity of the bonds, which Fitch views as a credit risk. Additionally, the BOT recently issued a request for proposals to explore lease renewal options.
FAVORABLE SERVICE AREA CHARACTERISTICS: BHC maintains a strong market share in a service area that features a stable and diverse economy with low unemployment.
IMPROVED PROFITABILITY: A failure by Boone Hospital Center to improve operating profitability to levels sufficient to provide for coverage metrics consistent with Fitch's 'A' category medians will likely result in negative rating movement.
BHC operates a regional medical center owned by BOT and leased to a subsidiary of BJC. BHC serves as a regional referral center across 26 mid-Missouri counties. Total operating revenues equaled $304 million in fiscal 2015.
Fitch analyzed the individual financial statements of BHC and BOT and also combined the statements to gain a consolidated view of the lease structure. All numbers referenced in this report are based upon the combined financials of BHC and BOT.
WEAKENED OPERATING PROFITABILITY
The Negative Outlook reflects BHC's weakened operating profitability in fiscal 2015. Prior to fiscal 2015, the hospital's operating profitability had been consistently robust, with operating EBITDA margin averaging 15.4% between fiscal years 2009 and 2014. Operating EBITDA margin decreased to 7% in fiscal 2015, comparing unfavorably to Fitch's 'A' category median of 10.3%.
The weakened operating profitability primarily reflects increased competition from a new ambulatory surgical center, increased nursing costs and staffing ratios as well as increased supplies expense. Management has taken steps to address these issues. Operating EBITDA margin improved to 10.2% in the three-month interim period ending March 31, 2016 (the interim period), however interim results are in line with interim results achieved in fiscal 2015.
Coverage metrics materially compressed in fiscal 2015, reflecting the weakened profitability. MADS decreased from $10 million to $7.4 million in fiscal 2016. BHC's debt burden is now light with MADS equal to 2.4% of fiscal 2015 operating revenue. However, MADS coverage by EBITDA decreased to 2.9x in fiscal 2015 and was weak relative to Fitch's 'A' category median of 4.2x. MADS coverage improved to 4.3x in the three-month interim period.
SOLID LIQUIDITY METRICS
Unrestricted cash and investments increased 6.5% since Fitch's last review to $143.8 million at March 31, 2016. Liquidity metrics are solid with 189.9 days cash on hand, 19.4x cushion ratio and 136% cash to debt and are consistent with Fitch's 'A' category medians of 205.3 days, 18.5x and 143.7%.
AFFILIATION WITH BJC
Fitch views BHC's strong affiliation with BJC as a primary credit strength. The hospital is owned by BOT and leased to CH Allied Services (CHAS), a subsidiary of BJC. CHAS is included in BJC's consolidated financial statements, and BHC's CEO is an employee of BJC. BHC benefits from BJC's managerial expertise and strategic support.
LEASE STRUCTURE RISK
The hospital lease does not extend through the maturity of the bonds, which Fitch views as a credit risk. The current lease term is through 2020 and with automatic five year renewal periods thereafter. Either party can terminate the lease by providing notice two years prior to the current expiration date. Fitch's analysis is based on the expectation that the lease is continually renewed through the maturity of the bonds.
The BOT initiated an RFP process in advance of the lease renewal date in 2018. Proposals are due during summer 2016, and the BOT expects to make decision on next steps in late 2016 or early 2017. Fitch will assess the impact, if any, of the outcome of the proposal process.
Under the terms of the lease, debt service is funded through lease payments by BHC to BOT. Debt service is defined to equal $10 million through 2015 after which the lease payment equals actual debt service due. Additionally, the lease includes a cash split of the increase in cash at BHC with 50% retained at BHC, 25% distributed to BOT and 25% distributed to CHAS. In the event that the hospital's revenues are insufficient to make the lease payment, BOT shall be responsible for 75% of the shortfall while CHAS shall be responsible for 25%. BOT may use the hospital reinvestment fund (board designated funds for capital improvements) to pay up to 50% of the shortfall.
RATE COVENANT VIOLATION
An agreed upon decrease in the cash split paid to BOT to cover prior year's expenses at BHC and BHC's weakened operating profitability in fiscal 2015 combined to cause a rate covenant violation on behalf of the BOT. Per the rate covenant calculation, BOT's debt service coverage decreased to 0.84x in fiscal 2015, below the minimum required 1.0x while the lease is in force. The rate covenant violation resulted in a mandatory consultant engagement. Per management, so long as the consultant's recommendations are deemed to be complied with, there will be no resulting event of default. The rate covenant does not reflect the total cash flow generated by BHC, which as noted above, provided for MADS coverage of 2.9x in fiscal 2015.
FAVORABLE SERVICE AREA CHARACTERISTICS
BHC's operating performance is bolstered by a solid market share in a stable service area. BHC is located in Columbia, Missouri which features a growing and diverse economic base anchored by the main campus of the University of Missouri. BHC holds a solid 20.2% market share in its primary service area while University of Missouri Health Care, BHC's primary competitor, holds a leading 26.2% share. The primary service area accounts for over 80% of BHC's inpatient discharges.
BHC had approximately $105.7 million of total debt outstanding at March 31, 2016. The series 2016 bond transactions is a refunding and will not materially affect total debt levels. The debt portfolio will remain 100% underlying fixed-rate. BHC is not counterparty to any swap agreements.
BHC covenants to disclose audited financial statements within 180 days of the end of the fiscal year and voluntarily discloses quarterly financial statements on the Municipal Securities Rulemaking Board's EMMA website.