OREANDA-NEWS. Fitch Ratings has assigned a 'BB' rating to the following bonds issued by the Board of Managers, Joint Guadalupe County - City of Seguin, TX Hospital, d/b/a Guadalupe Regional Medical Center (GRMC):

--$119.5 million hospital mortgage revenue, refunding and improvement bonds, series 2015.

Bond proceeds will refund about $89 million of existing debt, finance $19 million of capital projects, provide funds for a debt service reserve account, and pay issuance costs. New money capital projects include a new surgical floor, cardiac service expansion, additional maternal services, and a new neonatal intensive care unit. The bonds are scheduled to sell via negotiated sale during the week of Nov. 2, 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.


HEAVY DEBT POSITION: Pro forma debt of nearly $120 million amounts to a very high 71% of capitalization and 7.7 times (x) EBITDA. These levels compare unfavorably to Fitch's below investment-grade medians of 58.5% and 5.1x, respectively. Furthermore, pro forma maximum annual debt service (MADS) as a percent of revenue is very high at 8% verses Fitch's below investment grade median of 4.4%.

MODEST OPERATING PROFILE: GRMC's relatively small operating profile with approximately $103 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 10% of gross revenues) and governmental payors (over 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, Texas. Both population and employment growth trends are very favorable, and GRMC secures an adequate 55% inpatient market-share in its primary service area in the city of Seguin, Texas. 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. Nonetheless, average earnings and cash flow performance has been solid. The operating and operating EBITDA margins averaged a very good 2.8% and 15%, respectively from fiscal years 2011-2015. These levels compare very favorably to Fitch's below investment grade medians of 0.3% and 8.1%, respectively for fiscal year 2014.

LIGHT BUT GROWING LIQUIDITY METRICS: Even after the release of nearly $7 million from a Federal Housing Administration (FHA) mortgage reserve fund, liquidity metrics are light. Pro forma unrestricted cash and investments of $32 million amount to 26.8% of pro forma debt, 132 days operating expenses or 4.1x cushion ratio at Aug. 31, 2015.


SUSTAINED CASH FLOW: Fitch expects Guadalupe Regional Medical Center to make the necessary adjustments to maintain its financial performance at levels similar to the past few years. However, a material reduction in supplemental funding due to changes in the Texas Medicaid Waiver program in fiscal 2017 resulting in weaker profitability and debt service coverage would lead to negative rating action.

IMPROVED LIQUIDITY POSITION: Reduced capital spending combined with healthy 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, Texas. 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 17 employed physicians in a variety of specialties.


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 will refund all of GRMC's FHA debt and provide $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.

These capital projects and service expansions are a result of a strategic planning process that has allowed for the recruitment of ten new physicians which led to volume gains in 2015. For example, inpatient admissions and births increased by about 8% and 9%, respectively during fiscal 2015. 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 last year 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 refunding, GRMC will have about $120 million of fixed rate debt outstanding, all from the series 2015 bonds. As a result, pro forma debt levels are very high and amount to 71% of capitalization, 7.7x EBITDA and 116% of total revenues. Additionally, pro forma MADS as a percent of revenue is a very high 8%. Nonetheless, the refinancing of the FHA insured bonds is beneficial to GRMC as it generates significant cash flow savings by lengthening the debt amortization, and permits the release of nearly $7 million of mortgage reserve funds to boost unrestricted cash balances. The debt restructuring also allows for a modest increase in proposed MADS of about $640,000, despite the $19 million new money borrowing and high cost of the securities for the refunding escrow account.


GRMC's 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. As a result, earnings and debt service coverage have been inconsistent. Nonetheless, average earnings and cash flow performance has been solid. The operating and operating EBITDA margins averaged a very good 2.8% and 15%, respectively from fiscal years 2011-2015. After fiscal 2013, supplemental payments leveled out a bit and GRMC produced solid MADS coverage of 2.4x in fiscal 2014 and a 2.0x for the unaudited 11 month period ending Aug. 31, 2015. Current year performance softened due to planned start-up expenses relating to GRMC's employed medical group expansion.


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.