Fitch Affirms Guadalupe Regional Medical Center, TX's Revenue Bonds at 'BB'; Outlook Stable
--$117.2 million hospital mortgage revenue, refunding and improvement bonds, series 2015.
The Rating Outlook is Stable.
The bonds are secured by a mortgage on hospital property, pledge of gross revenues and a debt service reserve fund.
KEY RATING DRIVERS
HEAVY DEBT POSITION: Long-term debt of nearly $117 million amounts to a very high 70.8% of capitalization and 8.4 times (x) EBITDA as of Aug. 31, 2016. These levels compare unfavorably to Fitch's below investment-grade medians of 58.5% and 4.9x, respectively. Furthermore, maximum annual debt service (MADS) as a percent of revenue is very high at 7.1% verses Fitch's below investment grade median of 3.8%.
MODEST OPERATING PROFILE: GRMC's relatively small operating profile with approximately $102 million of revenues and an average daily inpatient census of about 41 leaves the organization susceptible to reimbursement modifications and changes in the delivery of health care. Additionally, GRMC's high exposure to self-payors (about 12% of gross revenues) and governmental payors (60% of gross revenues) limits operational and financial flexibility.
ADEQUATE MARKET POSITION IN A GROWING SERVICE AREA: GRMC benefits from its location in a rapidly growing region about 35 miles east of San Antonio, TX. Both population and employment growth trends are very favorable, and GRMC secures an adequate 55% inpatient market-share in the city of Seguin, TX. Regardless, outmigration levels to San Antonio providers are somewhat high, and secondary service area competition is evident from two hospitals in New Braunfels located about 16 miles away.
RELIANCE ON SUPPLEMENTAL FUNDING: Given its reliance on the uneven flow of supplemental Medicaid funding, GRMC's operating profitability has been volatile over the past five years. Earnings and cash flow were solid in fiscal 2013 and 2014, but weakened a bit in fiscal 2015 and the current fiscal year. The operating and operating EBITDA margins amounted to 1.2% and 11.9%, respectively through the first 11 months of fiscal 2016 mostly due to losses at its affiliated medical group and lower inpatient volumes.
LIGHT BUT GROWING LIQUIDITY METRICS: After the release of nearly $7 million from a Federal Housing Administration (FHA) mortgage reserve fund, liquidity metrics are light, but growing. Unrestricted cash and investments of nearly $36 million amount to 30.1% of debt, 130.7 days operating expenses or 4.7x cushion ratio at Aug. 31, 2016.
SUSTAINED CASH FLOW: Fitch expects Guadalupe Regional Medical Center to make the necessary adjustments to rebuild its financial performance. However, weaker operations or a material reduction in supplemental funding due to changes in the Texas Medicaid Waiver program that results in lower profitability and debt service coverage would lead to negative rating action.
IMPROVED LIQUIDITY POSITION: Reduced capital spending combined with adequate cash flow is expected to steadily build liquidity balances. Actual performance that strengthens liquidity beyond projected levels could allow for upward movement in the rating.
GRMC is a joint municipal and county hospital licensed for 125 beds and located approximately 35 miles east of San Antonio, TX. It is the only city/county healthcare entity in the state of Texas. GRMC's sponsors are Guadalupe County and the city of Seguin, both of which provide funds to support charity care that amounted to about $2.8 million in fiscal 2015. The medical center began operations in 1961 and the original hospital facility was built in 1965 and dramatically renovated and expanded in 2010. GRMC's medical group has recently grown and now includes 12 employed physicians in a variety of specialties.
BOND REFUNDING AND CAPITAL SPENDING
GRMC issued $99 million of FHA insured bonds in 2007 to expand and renovate most of its hospital facilities. Proceeds from the series 2015 bonds refunded all of GRMC's FHA debt and provided $19 million of new money to fund various capital projects including replacement of the existing inpatient surgical suites, relocating and enlarging the inpatient dialysis unit, addition of a second cardiac catheterization laboratory, new space for pre-operative and post-operative surgical recovery, moving and expanding obstetrical services, and the creation of a new level II neonatal intensive care unit. The projects are progressing slowly and only about $2 million has been spent through Aug. 31, 2016. Moreover, management's plans for the neonatal intensive care unit have changed since these services can be provided at existing facilities in a more efficient manner.
These capital projects and service expansions are a result of a strategic planning process that has allowed for the recruitment of about 10 new physicians which led to volume gains during fiscal 2014 and 2015. However, inpatient admissions and births declined 4.9% and 4.3%, respectively during the current fiscal year as a result of physician turnover. The facility improvements and service additions are in response to a rapidly growing market area population and competitive pressures emerging from a new hospital facility that opened during 2014 in New Braunfels (located 16 miles away). While Fitch views these capital plans favorably given the business growth opportunities, GRMC's very heavy debt burden is a limiting rating factor.
After the series 2015 refunding bond issue, GRMC has $119 million of fixed rate debt outstanding. As a result, debt levels are very high and amount to 70.8% of capitalization, 8.4x EBITDA and 111% of total revenues. Additionally, MADS as a percent of revenue is high at 7.1%. Nonetheless, the refinancing of the FHA insured bonds was beneficial to GRMC since it generated significant cash flow savings by lengthening the debt amortization, and permitted the release of nearly $7 million of mortgage reserve funds to boost unrestricted cash balances. The debt restructuring also allowed for only a modest increase in MADS of about $600,000, despite the $19 million new money proceeds.
GRMC's restrictive payor mix and reliance on the uneven flow of supplemental Medicaid funding leads to volatile operating profitability. During fiscal 2012, under the state of Texas' Medicaid waiver program, the previous payment methodology for treating unfunded and indigent patients was modified. While GRMC has benefited from the new funding programs, payments have been delayed and variable. For instance, GRMC received $1.9 million of supplemental payments in fiscal 2012 and $13.2 million in fiscal 2013. Supplemental payments were about $7.6 million in fiscal 2015 and expected to be about $5.4 million in both fiscal 2016 and 2017. The Texas Medicaid waiver program expires at the end of calendar year 2017. A program elimination or modification that dramatically reduces supplemental payments could cause negative rating pressure.
As a result of this volatility, earnings and debt service coverage have been inconsistent. Profitability and cash flow were solid in fiscal 2013 and 2014, but weakened in fiscal 2015 and the current fiscal year. The operating margin declined to 0.5% and 1.2%, respectively in fiscal 2015 and the 11 month period ending Aug. 31, 2016. The profitability reduction is mostly a result of planned start-up expenses at GRMC's employed medical group and lower inpatient volumes in the current fiscal year. The medical group lost about $2 million in fiscal 2015 and another $2.2 million during the first 11 months of fiscal 2016. Management expects medical group losses to moderate due to operational modifications and the maturation of the physician practices.
Despite the financial volatility, debt service coverage is adequate for the rating category. After fiscal 2013, the supplemental payments leveled out a bit and GRMC produced MADS coverage of 2.5x in fiscal 2014, 1.7x in fiscal 2015, and 1.9x for the unaudited 11 month period of fiscal 2016.
GRMC covenants to provide bondholders with quarterly financial information and operating statistics within 60 days of quarter-end and annual financial statements and operating statistics within 150 days of fiscal year-end.