Fitch Upgrades Baptist Health Care Corp's (FL) Rev Bonds to 'A-'; Outlook to Stable
--\$146.5 million Escambia County, FL health facilities authority revenue bonds (Baptist Hospital Inc. Project) series 2010A.
The Rating Outlook has been revised to Stable from Positive.
Security interest in certain pledged revenues, mortgage pledge on Gulf Breeze Hospital, and debt service reserve fund.
KEY RATING DRIVERS
IMPROVED LIQUIDITY POSITION: As of Dec. 31, 2014 (three months into fiscal 2015; unaudited), BHCC had unrestricted cash and investments totaling \$263.8 million, which translated into 141.3 days cash on hand, 13.9x cushion ratio, and 116.3% cash-to-debt. BHCC's liquidity metrics have improved significantly since fiscal 2008 reflecting a 76% increase in unrestricted liquidity over the past four fiscal years. Liquidity growth has been driven by improved profitability, better investment returns, muted capital spending, improved revenue-cycle and sale of non-core assets. The growth in liquidity is a key factor in Fitch's rating upgrade.
SUSTAINED FINANCIAL IMPROVEMENT: The rating upgrade is reflective of BHCC's sustained financial improvement, which Fitch believes is the result of effective management practices. Excluding certain one-time items, BHCC earned approximately \$24.1 million in operating income in fiscal 2014 (Sept. 30, 2014; audited), which is down slightly from BHCC's record high of \$26.8 million of operating income generated in fiscal 2013. The sustained financial improvement continues to be driven by good volume growth in key service lines such as orthopedics and cardiology, continued cost management, and receipt of meaningful use monies, among other things. Specially, BHCC's operating margin and operating EBITDA margins of 3.4% and 8.5% compared consistently with Fitch's 'A' category medians of 2.5% and 9.5%, respectively. Including one-time items, BHCC earned a record \$38 million in income from operations equating to a 5.2% operating margin and 10.3% operating EBITDA margin.
LEADING MARKET POSITION: Once a major credit concern, BHCC has increased its market share and has been the market leader for two consecutive years. Market share growth has been driven by specific service line volume growth through successful strategic physician alignment initiatives. BHCC's market share was nearly 36% through June 30, 2014, which demonstrates an improving trend from 34% in 2011. BHCC's next closest competitor is Sacred Heart Hospital (part of Ascension Health; revenue bonds rated 'AA+'; Stable Outlook by Fitch), which has an approximate 32% share, down from 36% in 2011.
EFFECTIVE MANAGEMENT PRACTICES: Fitch views BHCC's management practices favorably, which are highlighted by growing the organization's market position and financial profile; maintaining an attractive physical plant, and producing top-tier quality care metrics.
MAINTENANCE OF CURRENT PROFILE: Fitch expects BHCC to maintain solid operating performance as it continues to capitalize on its strategic investments. Sustained operating profitability should produce enhanced liquidity ratios and solid debt service coverage metrics.
PENDING CAPITAL NEEDS: Management intends to spend approximately \$110 million on capital over the next three years a portion, of which, is expected to be funded with debt. Although undetermined at this time, Fitch expects any additional debt issuance to be commensurate with the organization's moderate debt capacity. Any significant deterioration to BHCC's current levels of debt service coverage along with a sizable increase in leverage would be viewed negatively.
BHCC operates Baptist Hospital, a 492-bed tertiary care hospital in Pensacola, FL; Gulf Breeze Hospital, a 77-bed acute care hospital in Gulf Breeze, FL; Atmore Community Hospital (49- licensed beds) and Jay Hospital (55-licensed beds) operating in certain counties in southern Alabama and northern Florida; and other health care related entities. Total operating revenue in fiscal 2014 was approximately \$726 million, which increased from fiscal 2013's \$690 million. BHCC won the Malcolm Baldrige National Quality Award in 2003 and is an indicator of the organization's culture and high quality and safety standards.
RATING UPGRADE TO 'A-'
The rating upgrade is supported by BHCC's sustained enhanced market position and solid operating performance, which helped produce good debt service coverage and increased liquidity metrics.
BHCC earned approximately \$24.1 million in operating income in fiscal 2014 (Sept. 30, 2014; audited), which was consistent with 2013's previous record high of \$26.8 million income from operations (excluding certain one-time items). One-time items included the sale of the Manor (a 170 unit skilled nursing facility) for \$11.2 million as well as Baptist Life Flight for \$2.7 million. Overall, Fitch continues to view BHCC's improved operating metrics favorably and as a primary credit strength, which is ultimately derived from the organization's effective management practices and strategy of growing its market presence in key service lines. In fiscal 2015, management is budgeting for a 2.5% operating margin, which Fitch views as conservative as it excludes approximately \$17.8 million of potential gains including \$6.2 million in meaningful use monies and various settlement claims, among other things.
Continuing to support the improved operating performance are several initiatives such as growing the organization's employed physician base through strategic physician alignment, implementation of various expense reduction and revenue enhancement plans (including revenue cycle and supply chain management), and enhancing key service lines (cardiology and orthopedics) that have helped grow the organization since 2010. Specifically, Fitch views BHCC's relationship with the 'Andrews Institute' (a joint-venture ambulatory surgery center with world-renowned orthopedic surgeon Dr. James Andrews) favorably, which has allowed the organization to grow its market position in orthopedics and also contribute to the organization's financial improvement. This relationship dates back to 2006, and, since that time the orthopedic service-line profitability has more than doubled. Orthopedics and neurosciences volume continues to be positive, which management expects will continue as the Andrews Institute has a regional and national draw.
Additionally, in July 2013 BHCC became a member of the Mayo Clinic Care Network (Mayo), which provides certain benefits such as co-branding and physician integration tools. Fitch views this relationship favorably as BHCC is the only Mayo affiliate in the Gulf Coast region, which extends approximately 150 miles.
Fitch also notes that BHCC's revenue base is diverse with 18.8% of net revenue related to vocational services. The vocational services are provided by individuals with disabilities and BHCC maintains contracts with governmental entities for these services. This service line is profitable and if a contract did not get renewed, the expenses should decline accordingly.
COMPETITIVE SERVICE AREA
BHCC continues to operate in a highly competitive service area, which is split among three main providers. BHCC has successfully taken over as the market leader during the last two years which is the culmination of a five year strategy, which Fitch views as major achievement. Sacred Heart Hospital (part of Ascension Health) has historically been the market leader and is now in the second position with approximately 32%, while West Florida (part of HCA) has an approximate 23% share. Fitch believes it is essential for BHCC to continue its strategic alignment initiatives with physicians in the service area to maintain its leading market position.
DEBT PROFILE & CAPITAL PLANS
As of Sept. 30, 2014, total outstanding debt was approximately \$228 million and includes \$157 million of bonded debt, \$52.8 million of notes payable, and \$17.7 million of capital leases and other debt. Fitch used a maximum annual debt service (MADS) of \$19 million, which incorporates all debt (assumes full amount drawn under capital lease) and treats balloon indebtedness in accordance with BHCC's master trust indenture. The debt portfolio is 74% fixed rate and 26% variable rate, which Fitch views as relatively conservative.
BHCC has three outstanding swaps for a total notional amount of \$60.4 million and includes a basis swap with Citi for \$40 million and two floating- to fixed-rate swaps with Bank of America for \$20.4 million. BHCC is required to post collateral at its current rating level if the mark to market exceeds \$5 million per counterparty. To date, BHCC is not posting any collateral.
MADS coverage by EBITDA was 3.3x and operating EBITDA was 3.2x, in fiscal 2014 (excluding one-time items), which were below Fitch's 'A' category medians of 3.8x and 3.1x, respectively. MADS as a percentage of revenue was 2.6% in fiscal 2014, which is relatively low and compared well against Fitch's 'A' category median of 3.1%.
Over the next three years management intends to spend approximately \$110 million on capital, which Fitch views as reasonable at the current rating level. Most notably, BHCC is contemplating an additional debt issuance in 2016 to fund the organization's electronic medical record succession plan. Although the exact size and scope of the project are not known at this time, Fitch expects any additional debt issuance to be commensurate with the organization's available debt capacity. Any significant deterioration to BHCC's current levels of debt service coverage along with a sizable increase in leverage would be viewed negatively.
BHCC covenants to provide annual audits within 150 days of fiscal year end and quarterly unaudited financials for the first three quarters within 45 days of quarter end.