Fitch Affirms John Fitzgibbon Memorial Hospital (MO) at 'BBB-'; Outlook Revised to Negative
--$9.9 million health facilities refunding bonds, series 2010.
The Rating Outlook is revised to Negative from Stable.
The bonds are secured by a pledge on gross revenues, a mortgage on certain hospital and nursing home property, and a debt service reserve.
KEY RATING DRIVERS
LAGGING PROFITABILITY: The Outlook revision to Negative reflects concern regarding JFMH's -4.2% operating loss in fiscal 2016 (unaudited, April 30 year-end), which were below budget, and resulted in very thin 1.3x coverage of maximum annual debt service (MADS) just ahead of the 1.25x covenant requirement. While losses were driven in part by non-recurring issues, higher capital plans in the near term will necessitate improved cash flow.
ADEQUATE BALANCE SHEET: The 'BBB-' continues to be supported in part by sufficient liquidity levels. At April 30, 2016, JFMH had $21.3 million in unrestricted cash and investments. Fitch adjusts unrestricted cash to $17 million to reflect collateralization of a $3.3 million note payable. This equates to 121.5 days of cash on hand, a 9.9x cushion ratio, and 102.8% cash to debt versus Fitch's 'BBB' category medians of 161.2 days, 11.7x, and 90.8% respectively.
MIXED SERVICE AREA CHARACTERISTICS: JFMH maintains a leading inpatient market position of 41% in Saline County in 2016, and a strong relationship with Boone Hospital Center (BHC; revenue bonds rated 'A'). Still, Fitch remains concerned about its vulnerability to government payors, and volatility in physician complement and clinical volume.
MODERATE DEBT BURDEN: Total debt was $20.7 million at April 30, 2016, which is all fixed rate. Leverage is manageable, with 39.5% debt to capitalization and 3.3% maximum annual debt service (MADS) as a percent of revenues. Capital needs will increase in 2017 to support a clinical information technology (IT) update, as well as to finance a medical office building purchase on JFMH's main campus.
IMPROVED CASH FLOW: Profitability is expected to improve for fiscal 2017, which will be necessary to preserve liquidity against increasing capital expenditures. A failure to narrow operating losses and maintain balance sheet strength in light of the increased capital costs expected in fiscal 2017 would likely prompt a downgrade.
JFMH is a 60-licensed bed hospital located in Saline County, MO, approximately 80 miles east of Kansas City. Operations also include a 99-bed skilled nursing facility and several rural health clinics. Total revenues in fiscal 2016 (unaudited, April 30 year-end) were $54.6 million. Fitch reviews and cites consolidated financial data, and the consolidated entity currently comprises the obligated group.
During unaudited fiscal 2016, JFMH produced a thin 4.4% EBITDA margin and 1.3x coverage of MADS, which was behind budget and well below the 8.9% EBITDA margin and 2.8x MADS coverage generated in fiscal 2015. Profitability was impacted by the departure of an orthopedic surgeon and associated clinical volume, several unfavorable health insurance claims, and other items expected not to reoccur. Given the very limited room to the required 1.25x coverage covenant, JFMH will need to narrow losses in order to preserve its 'BBB-' rating.
While liquidity currently provides some cushion against operating volatility, increasing capital outlays expected in fiscal 2017 could pressure JFMH's balance sheet absent improved profitability. JFMH is undertaking a sizeable IT conversion, as well as purchasing a medical office building (MOB) which will bring is total capital outlay to approximately $5 million in 2017. Spending will be funded via a mix of cash flow and non-recourse debt. JFMH will need to generate better EBITDA than the $2.4 million produced in fiscal 2016, in order to fund these expenditures without impacting liquidity.
MIXED SERVICE AREA
JFMH has long held leading market share in Saline County, which along with its relationship with Boone Hospital Center, has helped sustain adequate profitability. Still, Fitch notes the relatively high exposure to government payors at 60% of gross revenues in fiscal 2016, limits JFMH's ability to achieve consistent revenue growth. Further, its rural location has made it challenging to recruit and maintain a stable medical staff over time, resulting in some operating volatility. While JFMH continues to successfully backfill its physician vacancies, the 'BBB-' rating is contingent upon successfully narrowing operating losses in fiscal 2017 to a historical level nearer to breakeven.
As of fiscal 2016, JFMH had $20.8 million in total debt which is all fixed rate. Total debt includes $7.6 million in privately held debt, and $3.3 million in a fully collateralized note payable. MADS is measured at $1.8 million, which JFMH covered at 1.34x per its unaudited covenant calculation in fiscal 2016.
JFMH has no swaps, and no defined pension obligation.
JFMH covenants to provide annual disclosure within 180 days and quarterly disclosure within 60 days of period end. Disclosure to Fitch has been timely, with good access to management.