Fitch Rates Chilton County Health Care Authority, AL's Sales Tax Bonds 'AA-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned an initial rating of 'AA-' to the following limited obligation bonds to be issued by the Chilton County Health Care Authority, AL (the authority):
--$38,475,000 limited obligation sales tax bonds, series 2015A (Chilton County hospital project).
The bonds will be sold via negotiation the week of Oct. 26. Proceeds will be used to finance the acquisition and construction of a new 30-bed general hospital and related outpatient facilities to be located in the city of Clanton, Alabama (the city), the county seat of Chilton County (the county).
The Rating Outlook is Stable.
The bonds are a limited obligation of the authority payable from a first lien on the proceeds of a 1% general sale and use tax levied and imposed within the county. The bonds are also secured by a debt service reserve fund (DSRF) which is expected to be funded from cash in an amount equal to maximum annual debt service (MADS) at closing.
KEY RATING DRIVERS
STRONG COVERAGE CUSHION: Estimated fiscal year 2015 sales tax revenues cover MADS by 1.5x, which Fitch considers a strong coverage cushion given the low historical volatility of the sales tax.
SALES TAX CONCENTRATION: The top 10 sales tax payers represent a mix of retail, restaurant, utility, manufacturing, and automobile dealer establishments accounting for a high 39% of fiscal year 2015 pledged revenue.
LOW LEVERAGE RISK: The trust indenture establishes an additional bonds test (ABT) equal to 1.5x MADS. Future development opportunities will exist for the new hospital upon its completion but there are no definitive plans for additional issuance at this time. Prospects for pay-go capital investments are supported by the restricted nature of the sales tax proceeds for hospital operations and capital.
SEPARATION OF OPERATING RISK: Based on the legal opinion of external counsel Fitch believes there is a reasonable basis to conclude that the revenues pledged to repay the bonds are 'special revenues' under the provisions of Chapter 9 and would not be subordinated to the necessary operating expenses of the county, the authority, or the hospital facility financed from bond proceeds.
DEBT SERVICE COVERAGE: Given the limited nature of the legal pledge, Fitch views the level of debt service coverage from pledged taxes as the key rating sensitivity. A variety of factors may influence coverage over time, including but not limited to the performance of the regional economy and issuance of additional parity indebtedness.
DIVERSIFICATION OF SALES TAX BASE: The concentrated nature of the sales tax base tempers the strengths associated with the stable sales tax history and high coverage cushion and likely limits the rating at the 'AA-' level. Improved diversification could support a higher rating, all else being equal.
The Chilton County Health Care Authority is a public hospital corporation authorized to acquire, construct, install and equip and operate health care facilities within the county. The authority is governed by a nine-member board of directors appointed by the Chilton County Commissioners. The authority is undertaking the construction of a new 30-bed general hospital to meet the healthcare needs of the county, which have not been served by a hospital since 2013. The project has broken ground and is on schedule for completion by June 2016. The authority has entered into a long-term lease with St. Vincent's Health System (STVH), a subsidiary of Ascension Health, and St. Vincent's Chilton, LLC (STVC) to operate the hospital.
SALES TAX AUTHORIZATION
The pledged revenue consists of a 1% general sales and use tax authorized by the Alabama Legislature in 2014 for the explicit and sole purpose of providing funds to pay the costs of construction, maintenance and operation of hospital facilities in the county. Imposition of the sales tax received overwhelming support from county voters at an advisory referendum in June 2014 (79.6% pass rate). The sales tax will be collected in the same manner and on the same transactions as the county's 1% education sales tax (references to historical collections below are based on the education sales tax). The sales tax levy is not contingent on the hospital's completion, its lease to an operator, or operation (see 'Bankruptcy Considerations' below for more information). The sales tax shall not terminate until all obligations secured by such have been repaid.
STRONG COVERAGE CUSHION
The resilient nature of historical sales tax collections and projected coverage of MADS temper revenue risk associated with the limited nature of the pledge to bondholders. Sales tax revenues have increased at a CAGR of 2.9% since fiscal year 2003 to a total of $3.6 million in fiscal year 2015 or 1.5x projected MADS. Fitch estimates sales tax revenue can decline by 34% before MADS coverage declines below 1.0x. In contrast, recessionary declines in sales tax revenue totaled 8.5% in aggregate from fiscal years 2008-2010.
SALES TAX RISK FACTORS
Despite steady growth in revenues the retail segment of the Chilton County economy is not particularly robust; retail sales on a per capita basis measure a low 68.7% of the Alabama average and 65.4% of the nation. Furthermore, a relatively high level of retail concentration exists. A total of $1.4 million or 39% of fiscal year 2015 sales tax revenue was derived from the 10 largest sales tax payers. The largest sales tax payers include Wal-Mart (IDR 'AA' by Fitch), Stokes Chevrolet, Winn Dixie, Dollar General, and Alabama Power Co. Information regarding sales tax remittance by entity is not publicly available. The high level of concentration exposes risk to a temporary diminution of MADS coverage from the disruption or closure of a single business entity that might not otherwise exist within a broader retail economy.
ADEQUATE GENERAL ECONOMIC PROFILE
The county's general economic and demographic profile should adequately support the longer-term viability of the retail base and collection of pledged sales tax revenue. Chilton County (not rated by Fitch) is located in central Alabama along Interstate 65 roughly 45-50 miles from the cities of Birmingham and Montgomery. Population gains have been steady albeit at a modestly declining pace, increasing by a CAGR of 1.0% from 2000-2010 but only 0.2% from 2010-2015. Resident employment as of August 2015 totaled 18,234 - a 2.1% increase over the same period a year earlier. Unemployment remains moderately elevated at 6.1% but has steadily improved since 2009. Median household income is below average, equal to 95% and 78% of the Alabama and U.S. norms, respectively.
The top employers in the county have been very stable. Johnson Controls (a supplier of automotive seat foam) employs 1,100 in the county after completing a $10.5 million investment in 2014 that added 100 new positions. The Chilton County Board of Education is the second largest employer (810) followed by Wal-Mart (300), Chilton County (200), Georgia Pacific (200) and Merchants Food Service (181). The new hospital is expected to employ 130. Prospects for job creation over the intermediate term could benefit from the recent announcement of the joint purchase of 520 acres of land by the city of Clanton and Chilton County for an industrial park adjacent Interstate 65 and Highway 145.
The authority entered into a $3 million loan agreement with Peoples Southern Bank to acquire the site of the new hospital backed by a pledge of the same sales tax revenue securing the series 2015A bonds. The bank loan will be restructured prior to issuance of the series 2015A bonds to subordinate its lien on sales tax revenue. There is no risk of cross-default or acceleration of principal. Principal on the bank loan is scheduled to amortize through 2025 but may be prepaid at any time without penalty from amounts held in the excess tax proceeds fund (ETPF), an account established under the trust indenture for the series 2015A bonds.
Amounts held in the ETPF are first applied to pay principal and interest on the series 2015A bonds (or any parity indebtedness) if for any reason money in the debt service fund is insufficient to do so. Thereafter amounts held in the ETPF can be used to pay subordinate debt (principal and interest), and thereafter, to make payments to STVC pursuant to the terms of a funding agreement between the authority, STVH and STVC. In exchange for STVC's commitment to provide indigent care, the authority has agreed to annually distribute amounts held in the ETPF to pay operating deficits of STVC or for the purpose of making capital improvements to the hospital.
Based on the legal opinion of external counsel Fitch believes there is a reasonable basis to conclude that the sales tax revenues pledged to repay the bonds are 'special revenues' under the provisions of Chapter 9 and will not constitute part of a bankruptcy filing commenced by or on behalf of the authority, the county, or STVC. According to the opinion, the pledged sales tax revenues will constitute property of the authority in a Chapter 9 filing and continue to be secured by the lien established by the pledge of such proceeds following commencement of a bankruptcy case. Furthermore, the opinion states that no portion of the pledged sales tax revenue needed to pay debt service will be subject to diversion to pay necessary operating expenses of the hospital. This provision applies only to the extent special revenues are derived from system activities.