Fitch Affirms Southeastern Regional Medical Center's (NC) Bonds at 'A'; Outlook Stable
The Rating Outlook is Stable.
Bond payments are secured by a pledge of the obligated group's accounts receivable and a negative pledge of all other assets.
KEY RATING DRIVERS
STRONG MARKET POSITION: SRMC has maintained strong market share in its primary service area (PSA), which accounts for over 85% of discharges. PSA market share equaled a leading 63% in fiscal 2015.
SOLID LIQUIDITY: Despite decreased unrestricted cash and investments, liquidity metrics remain strong relative to debt with 246.9% cash to debt and 24.3x cushion ratio at June 30, 2016.
MANAGEABLE DEBT BURDEN: SRMC's debt burden remains extremely manageable with maximum annual debt service (MADS) equal to 1.9% of fiscal 2015 revenues allowing for solid MADS coverage by operating EBITDA of 4.4x in fiscal 2015 and 3.9x in the nine month interim period ending June 30, 2016 (the interim period) despite light operating profitability.
LIGHT OPERATING PROFITABILITY: Operating profitability rebounded from compressed levels in fiscal 2013 with operating EBITDA margin increasing to 8.1% in fiscal 2014 and 8.2% in fiscal 2015. Operating profitability remains modest for the rating category, but the light operating profitability is mitigated by SRMC's solid liquidity metrics and manageable debt burden.
MAINTAINED COVERAGE AND LIQUIDITY: Fitch expects that Southeastern Regional Medical Center will maintain its manageable debt burden, strong coverage and solid liquidity metrics, thereby mitigating its light operating profitability.
SRMC operates a 292-bed acute care hospital located in Lumberton, NC. Additional operations include 33 inpatient psychiatric beds, a 12 bed inpatient hospice center, a 115 bed skilled nursing and Alzheimer's care center, a home health agency, a medical and radiation oncology center, 34 rural health clinics, a durable medical equipment center, and a recreation and exercise facility, all of which are located in Robeson County, North Carolina. Operating revenues equaled $309.4 million in fiscal 2015.
STRONG MARKET POSITION
SRMC's market share has been consistently strong in its PSA of Robeson County, NC. PSA market share consistently increased each year to 64.3% in fiscal 2013 from 61.6% in fiscal 2009 before decreasing slightly to 63% in fiscal 2015. The PSA accounts for over 85% of SRMC's discharges. SRMC's strong market position and status as the only hospital in its PSA enhances SRMC's overall credit profile. Additionally, SRMC's academic affiliation entered into in 2015 as the teaching hospital of the Campbell University School of Osteopathic Medicine, a new medical school that opened in 2013, is expected to enhance physician alignment, provide a source of new physicians and increase SRMC's patient draw, thereby solidifying SRMC's strong market position.
Unrestricted liquidity decreased since Fitch's last review from $167 million at June 30, 2014 to $140.7 million at June 30, 2016. The decrease is primarily due to a combination of unrealized losses and capital spending. Despite the decrease, unrestricted liquidity metrics remain strong relative to debt with 24.3x cushion ratio and 246.9% cash to debt, easily exceeding Fitch's 'A' category medians of 18.5x and 143.7%. However, 175.5 days cash on hand is now modest relative to Fitch's 'A' category median of 205.3 days.
MANAGEABLE DEBT BURDEN
SRMC's low debt burden allows for strong MADS coverage despite the light operating profitability. The system's low leverage and debt burden is highlighted by its 17.8% debt to capitalization at June 30, 2016 and MADS equal to 1.9% of fiscal 2015 operating revenue. Both metrics are well below Fitch's 'A' category medians of 36.2% and 2.8%, respectively. However, debt to EBITDA of 2.1x is low relative to Fitch's 'A' category median of 3.0x reflecting SRMC's modest operating profitability. MADS coverage by EBITDA and operating EBITDA equaled 5.3x and 4.4x, respectively, in fiscal 2015 and 5.0x and 3.9x in the interim period, easily exceeding Fitch's 'A' category medians of 4.2x and 3.5x, respectively.
Management expects to issue new bonds in 2017 to fund certain capital projects and to provide reimbursement for prior capital projects. However, plans are currently preliminary and the bond structure and par amounts are to be determined. Management has stated that a primary goal of any bond issuance is to maintain SRMC's credit profile at levels consistent with the current 'A' rating. Significant capital projects include the renovation of SRMC's former outpatient surgery space and relocation of inpatient surgical suites to the newly renovated space in addition to the implementation of a new IT system. Fitch will assess the credit impact, if any, of a new bond issuance as details become more certain.
LIGHT OPERATING PROFITABILITY
Operating profitability rebounded from compressed levels fiscal 2013, but remains light for the rating category. Operating EBITDA margin decreased to 6.4% in fiscal 2013 due to a combination of Medicare cuts, Medicaid cuts in North Carolina, and increased bad debt. Operating EBITDA margin increased to 8.1% in fiscal 2014 and 8.2% in fiscal 2015 but remains light relative to Fitch's 'A' category median of 10.3%. Operating EBITDA margin equaled 7.2% in the interim period and is in line with the prior year's interim period results. The compressed interim period operating profitability primarily reflects the timing of receipt of state supplemental funding. Operating profitability has been pressured by increased nursing agency costs, increased pharmaceutical expenses and start-up costs associated with a new joint venture ambulatory surgical center (ASC). However, the ASC is expected to achieve profitability during fiscal 2016 and management is proactively addressing the other challenges. The light operating profitability is currently mitigated by SRMC's manageable debt burden and solid liquidity metrics.
SRMC had approximately $57 million of total debt outstanding at June 30, 2016. In addition to the series 2012 bonds, total debt includes approximately $18 million of series 2005 bonds that are not rated by Fitch and various capital leases. The bond portfolio is comprised of 66% underlying fixed rate bonds and 34% underlying variable rate bonds. SRMC is not counterparty to any swap agreements.
SRMC covenants to provide annual disclosure within 120 days of the end of each fiscal year and quarterly disclosure within 45 days of the end of each fiscal quarter. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.