Fitch Rates St. Anthony's Medical Center's (MO) 2015B Revs 'A'; Outlook Stable
-\\$65,260,000 Health Facilities Revenue Bonds Series 2015B.
The Rating Outlook is Stable.
The bond are expected be issued as fixed rate. Bond proceeds will be used to refund a portion of SAMC's 2013 variable rate debt. The series 2015B bonds are expected to be priced through negotiation the week of Oct 12th.
Concurrent with the public bond offering, SAMC is closing on two bank placements, one of which will be consolidating \\$84.3 million of SAMC's series 2013 variable rated debt with one bank and refunding the remaining series 2013 bonds of the same amount. The other placement will refund a portion of the series 2013 debt and provide \\$15 million of new money to fund various capital projects, with a total par amount of approximately \\$34.4 million. The issue will be fixed rate and amortize over ten years. Total long term debt after issuance will be approximately \\$183.9 million.
Pledge of gross receipts and a negative mortgage pledge on the main campus.
KEY RATING DRIVERS
SOLID BALANCE SHEET: The 'A' rating is supported by SAMC's strong balance sheet, with its liquidity metrics on a pro forma basis above Fitch's 'A' category medians. In addition, in spite of weaker cash flow, SAMC has grown its unrestricted cash and investments by 25% since fiscal year 2012 (Jun 30 year end).
WEAK OPERATING PROFITABILITY: SAMC has posted operating losses in two out of the last four years, including in FY2015. Operating EBITDA margins have ranged between 6.2% and 9.4% annually which are weak relative to the 2015 'A' category median of 10.3%
CEO TURNOVER: Fitch attributes some of the weaker performance to turnover at the CEO position. After a long serving CEO retired in 2012, none of his replacements has lasted longer than approximately a year. The Board Chair is currently serving as CEO, taking over the position on the first of September. A turnaround plan is in place, and Fitch expects SAMC's operating results to improve over the next two years.
MANAGEABLE DEBT BURDEN: Pro forma maximum annual debt service (MADS) of \\$10.7 million equates to a modest 2.2% of FY15 revenue compared to the 'A' category median of 2.8%. As a result, historical pro-forma coverage of MADS by EBITDA has been solid at 4.7x and 3.5x in fiscal 2014 and 2015, respectively despite SAMC's weak profitability. Debt burden is not expected to increase as SAMC's capital needs are modest.
GOOD MARKET POSITION: While operating in the competitive St. Louis market, SAMC has been able maintain a leading inpatient market share (33.3% in 2014) in its primary service area, which includes a portion of the City of St. Louis, south of South County, St. Louis County, and portions of Jefferson County, Missouri and Monroe County, Illinois. SAMC's market position is supported by a solid base of primary care physicians.
EXECUTION OF TURNAROUND PLAN KEY: Fitch believes breakeven performance by St Anthony's Medical Center would be adequate enough to maintain the rating. Execution of the turnaround plan that results in profitability margins closer to the median levels leading to improved MADS coverage and further growth in liquidity could lead to upward movement in the rating.
St. Anthony's Medical Center is an acute care hospital located in south St. Louis, MO, with 767 licensed beds, of which 644 are acute, 49 are rehab, and 74 are psych. SAMC currently operates 579 staffed beds.
The obligated group includes the medical center and an associated foundation. For analysis, Fitch uses consolidated operating results, which includes an affiliate physician group, St. Anthony's Physician Organization (SAPO). Total consolidated operating revenue in FY15 was \\$482.5 million.
Negative 2015 Performance
Audited FY15 results show a negative 1.5% operating margin (a \\$7.1 million loss on operations) and a 6.2% operating EBITDA margin, significantly below Fitch's 'A' medians of 3.6% and 10.3%, respectively. Through the four year historical period, SAMC's operating margins have been about breakeven and its operating EBTIDA margin has averaged 7.9%.
SAMC management attributes the FY15 operating loss to lower than budgeted patient volumes. In response, SAMC has put forth a strategic turnaround plan with a number of cost cutting and revenue producing initiatives. The plan includes improvements to group purchasing, revenue cycle, human resource cost management, and growth initiatives, including a new medical office building in Kirkwood that SAMC purchased for \\$6.9 million in FY14.
While Fitch is concerned with SAMC's operating loss in FY15, given SAMC's manageable debt burden and strong liquidity, Fitch believes SAMC need not improve its financial performance materially to maintain the rating at the current level. In FY13, SAMC had a 0.8% operating margin which produced very solid pro forma MADS coverage of 5x.
A return to positive margins, coupled with no deterioration in liquidity, would be enough to sustain the rating over the medium term. A longer trend of operating margins that are closer to the median would likely lead to an upgrade.
In terms of liquidity, SAMC had \\$299 million in unrestricted cash and investments at June 30, 2015, which equated to 238.7 days cash on hand, a 27.9x pro forma cushion ratio, and 161.3% pro forma cash to debt, all above Fitch's 'A' category medians.
SAMC has struggled to stabilize the CEO position after a long serving CEO retired in 2012. His replacement and subsequent CEOs have lasted approximately one year each. Fitch believes this turnover has hampered SAMC's ability to formulate and execute a longer term strategy, especially on key growth initiatives, and that this has been a driver of the weaker operating performance.
On the first of September, the current Board Chair, at the request of other board members, took over the CEO position, and is now serving both positions. Fitch notes that this arrangement does raise credit concerns related to the proper separation between the board and management. In addition, the CEO, while a business professional, has limited experience in the health care sector.
However, Fitch met with the senior management team, including the new CEO, and believes the situation, while unusual, is appropriate given the situation and has the potential to stabilize leadership at SAMC over the near term. The Board Chair/CEO has a long history with the organization, serving on the board for 14 years. At a meeting with Fitch, the CEO seemed well versed in the specific challenges at SAMC, the details of the turnaround plan, and of trends in the broader health care sector.
Fitch also notes that an Office of President was established a few years ago, which includes the Chief Medical Officer, the Chief Nursing Officer and the President of SAPO, SAMC's employed physician group, and that the office has helped offset some of the impact of the instability at the CEO position. SAMC has moved forward on clinical initiatives, including improved quality indicators, and was also able to strengthen physician relations, over this time. The Office of the President has also moved the organization closer to becoming a physician-led enterprise.
Fitch will continue to monitor the governance and management structure at SAMC closely and expects the execution of the turnaround plan to be an important performance indicator of the current management team.
Manageable Debt Burden
SAMC has a manageable debt burden as indicated by pro forma MADS as percent of revenue of 2.2%, at June 30, 2015, relative to a median of 2.8%. The manageable debt burden has enabled SAMC to maintain relatively solid coverage in spite of the weaker operating performance. Pro forma debt to EBITDA was elevated at 4.9x, above the median of 3x, but Fitch expects this to moderate as operations improve.
Fitch expects SAMC's capital needs to remain manageable over the medium term. Fitch toured the campus and found the patient floors and patient rooms (which are almost all private) to be in very good condition. The operating rooms and the intensive care unit were renovated back in 2011, and the renovations included a new hybrid operating room.
The cost to purchase and renovate Phase 1 of the new building in Kirkwood is estimated to be approximately \\$15.7 million, including approximately \\$1.7 million of equipment, and will be funded by cash flow. Fitch expects the Kirkwood building to be accretive to SAMC's overall performance once renovations are completed. SAMC's information technology expenses should remain manageable as well. SAMC has attested to meaningful use and is a HIMSS 6 level hospital.
Moving forward the two largest projects are expected to be the renovation of the maternity floor and an expansion of the cancer center. The cancer center, which is in the planning phases, would be the larger of the two projects and is at least two years away. Fitch will factor the project into the rating as plans clarify but believes SAMC has capacity to fund the project should its performance return to positive levels.
Post issuance, SAMC will have approximately \\$183.9 million in long term debt of which approximately 55% will be fixed rate and 45% variable. This debt mix is more conservative than SAMC's current debt mix, which is 100% variable rate bank debt, with a single call date for all the debt.
Approximately 36% of SAMC's debt (\\$66 million) will be long term fixed rate public debt, with the remaining \\$119 million bank placed. The bank placements, which are with two separate banks, are on parity with the fixed rate offering and have the same covenants. SAMC's strong liquidity position, with 100% unrestricted cash and investments relative to the bank debt, mitigate concerns on the level of bank debt.
SAMC has two swaps that hedge the variable rate debt, each with a notional value of approximately \\$84 million. There are two counterparties to the swaps and no collateral posting requirements at the current rating level. The mark to market on the swaps was a negative \\$1.2 million as of June 30, 2015. Post issuance, only one swap will remain outstanding.
SAMC covenants to submit audited consolidated financial statements 150 days after year end and unaudited financial statements 60 days after December 31st each year to EMMA.