Fitch Rates Holland Community Hospital (MI) 'A+'; Outlook Stable
--$39.2 million series 2016A;
--$36.7 million series 2013A.
The series 2016A bonds are expected to be structured as conventional fixed-rate debt. Bond proceeds will fund approximately $23.0 million of capital improvements, refinance approximately $19.1 million of outstanding series 2004B bonds and a $4.2 million Michigan Finance Authority HELP loan and pay costs of issuance. The bonds are expected to price on or about Sept. 22nd through negotiated sale.
The Rating Outlook is Stable.
Bonds are payable from a pledge of the gross revenues of the obligated group and a security interest in collateral consisting of receivables and intangibles.
KEY RATING DRIVERS
BALANCE SHEET STRENGTH: HH's liquidity is a key credit strength. At June 30, 2016, HH had unrestricted cash and investment of $211.5 million, which equates to 351.6 days cash on hand (DCOH) and 227.7% cash to pro forma debt; both metrics well exceed Fitch's 'A' category medians of 215.5 DCOH and 148.6% cash to debt.
LEADING LOCAL MARKET POSITION: HH is an independent community hospital with a leading inpatient market share of 54.5% in its two-county primary service area; more than twice that of its closest competitor. Good local demographic trends and a growing medical staff support stable inpatient volumes and solid operating performance. Further, HH has a collaborative relationship with Spectrum Health, the largest system serving the West Michigan region, which should allow HH to maintain its current market position and support its strategy to expand selectively into adjacent markets.
STRONG OPERATING PROFITABILITY: HH has a track record of strong operating cash flow. Operating EBITDA margins have been in line with or better than Fitch's 'A' category median of 10.3% in recent years, including 11.3% in fiscal 2016.
MODEST DEBT BURDEN: HH has manageable leverage with low pro forma debt to capitalization of 21.9% and pro-forma maximum annual debt service (MADS) equal to 2.6% of fiscal 2016 total revenues. Historical coverage of pro forma MADS by EBITDA has been strong at 5.4x and 5.3x in fiscal 2016 and 2015, respectively, when compared to the 'A' category median of 4.5x. Capital needs are manageable, and the refunding plan will move HH to a more conservative, fully fixed-rate debt structure.
SMALL REVENUE BASE: Holland Community Hospital's small revenue base inherently exposes the organization to greater operating volatility due to changes in physician staff and changes in local demographics and economic activity. However, Fitch believes HH's strong balance sheet, collaborative relationship with Spectrum and strong management practices serve to mitigate those risks and allow for ratings stability.
BALANCE SHEET STRENGTHENING: Fitch expects Holland Community Hospital to maintain its historical profitability and operating stability going forward. Over the long term, continued operating stability combined with further strengthening of liquidity metrics could allow for positive rating movement.
Holland Community Hospital is an independent community hospital in Holland, MI. It operates 173 acute care and 16 psychiatric beds with a primary service area covering the Ottawa and Allegan counties in the West Michigan region. Fitch's analysis considers HH, which is the only member of the obligated group. Non-obligated joint ventures and related corporations are recorded using the equity method. Total operating revenue in fiscal 2016 was $235.1 million.
PLAN OF FINANCE
Approximately $23 million of debt proceeds will be new money used to finance several capital projects including a surgical expansion, cath lab relocation, software updates, and other building and equipment improvements. Projects support growing service lines and maintenance of HH's already-high quality.
Approximately $23 million of net proceeds will be used to refinance the series 2004B variable rate demand bonds and a 2013 variable rate equipment loan from the Michigan Finance Authority. The refinancing will result in a more conservative debt structure: all fixed-rate bonds, amortizing over 30 years with level debt service through fiscal 2040.
STRONG BALANCE SHEET
HH has a strong liquidity position, providing flexibility to fund capital needs and weather any unexpected operating stress. Unrestricted cash was $211.5 million as of June 30, 2016, equal to 351.6 days cash on hand (DCOH) and 227.7% cash to pro forma debt. Both metrics are well ahead of Fitch's 'A' category median metrics of 215.5 DCOH and 148.6% cash to debt. HH has built its strong balance sheet over time, primarily from retained earnings. There is also a board-designated foundation fund, which supports HH's community service activities.
LEADING MARKET SHARE
HH has a strong market position in its two-county primary service area (Ottawa and Allegan Counties), with inpatient market share of 54.5% compared to 20.6% for its closest competitor, Spectrum Health. Its service area has sound economic indicators and is expected to experience moderate population growth over the medium term, supporting HH's favorable utilization trends and payor mix.
Fitch considers HH's strong market position durable. Despite its smaller revenue size, HH recruits effectively and has a growing medical staff. Fitch believes HH benefits from its location along the shore of Lake Michigan from an employee retention and a physician recruitment standpoint as demonstrated by a low nurse vacancy rate of just 2.5% in 2016 and the addition of 92 physicians to the medical staff over the last three years. Strong quality metrics and physician alignment through Holland Community PHO benefit HH in its managed care relationships. Finally, HH has a very cooperative relationship with Spectrum Health System, the largest health system in the West Michigan region including several joint venture arrangements.
A track record of steady strong operating cash flow mitigates risk of higher volatility from HH's small revenue base. Operating EBITDA margins have been in line with or better than Fitch's 'A' category median of 10.3% in recent years, including 11.3% in fiscal 2016. HH is budgeting similar results in fiscal 2017, and is on track through three months ended June 30th with operating EBITDA margin of 11.7%.
Growth initiatives include the current capital projects to support growing surgical and cardiology volumes, selective expansion into secondary markets through a joint venture, and expansion of 340B drug discount program eligibility across its physician groups. HH manages cost well, and a good relationship with nurses and staff provide additional operating flexibility.
LOW DEBT BURDEN
The new debt is not a concern at this rating level due to HH's manageable leverage position and low debt burden. Pro-forma MADS of $6.1 million is a slight increase from current MADS of $5.3 million. The 2016 financing will convert all of HH outstanding debt to fixed rate which is viewed positively. Pro forma debt to capitalization of 21.9% at June 30, 2016 and pro-forma MADS as a percentage of fiscal 2016 revenues of 2.6% both compare favorably to the respective 'A' category medians of 36.0% and 2.7%. Historical coverage of pro-forma MADS by EBITDA is strong at 5.4x in fiscal 2016 and 5.3x in fiscal 2015 and exceeds the 'A' category median of 4.5x.
HH covenants to provide continuing disclosure, with the submission of audited financial statements within 180 days of fiscal year end. Quarterly statements will be provided within 45 days of quarter end.