Fitch Rates Peterson Regional Medical Center (TX) Series 2015 Revs 'BBB+'; Outlook Stable
--$61.8 million series 2015.
The series 2015 bonds are being issued to refund the outstanding series 2005 bonds and to pay costs of issuance. The bonds are expected to be fixed rate, and price the week of Nov. 10 via negotiated sale.
In addition, Fitch upgrades the following:
--$67 million series 2005 to 'BBB+' from 'BBB'.
The Rating Outlook is Stable.
The series 2015 bonds are expected to be secured by pledge and security interest in unrestricted receivables and a mortgage lien on hospital property. A debt service reserve is not expected to be funded.
KEY RATING DRIVERS
IMPROVED FINANCIAL PROFILE: The upgrade to 'BBB+' reflects PRMC's improved pro forma financial profile. A moderation in PRMCs debt service coupled with strong profitability results in very healthy historical pro forma coverage by operating EBITDA of 3x or better in each of the last three fiscal years; better than the 'BBB' category median of 2.4x.
MODERATING DEBT BURDEN: The upgrade is supported in part by a moderation in PRMC's leverage metrics, which have been a key credit constraint in prior reviews. The series 2015 financing will reduce PRMC's debt burden, bringing related leverage ratios more in line with Fitch's 'BBB' category medians.
HEALTHY OPERATING PERFORMANCE: The upgrade also reflects PRMC's strong and consistent operating results over the last three fiscal years (year-ended June 30). PRMC generated operating EBITDA margins of 12.2% and 13.4% in fiscal 2015 and 2014, respectively, both ahead of budget and the 'BBB' category median of 7.7%. Going forward, steady recurring results are expected to be supported by solid physician alignment and clinical volume growth, as well as ongoing cost controls.
STRONG LIQUIDITY POSITION: PRMC maintains solid balance sheet, with liquidity metrics that all exceed Fitch's 'BBB' category medians. At Aug. 31, 2015, PRMC had $109.4 million in unrestricted liquidity, equating to 384.1 days cash on hand (DCOH) and 172.3% cash-to debt.
LIMITED OPERATING BASE: The rating also reflects PRMC's relatively limited operating base in south central Texas, which has resulted in some operating volatility in prior years. PRMC's position as the only hospital within Kerr County provides for a stable and leading market position at 64% in 2015. However, Fitch believes that PRMC may be exposed to increasing competition from tertiary providers based in San Antonio for certain clinical services.
STEADY OPERATING PERFORMANCE: Fitch expects Peterson Regional Medical Center to generate healthy cash flow and maintain a strong liquidity position to help offset the risks associated with its relatively small revenue base ($120 million) for the rating category.
PRMC is a 124-licensed-bed community hospital located in Kerrville, TX approximately 60 miles from San Antonio. The system also includes a foundation and a physician group practice organization. PRMC had total operating revenues of $111 million in fiscal 2015 (year ended June 30).
HEALTHY OPERATING PROFITABILITY
Healthy growth in clinical activity driven by successful physician alignment and by targeted service line expansion, helped produce a significant increase in revenue and operating profitability in fiscal 2015. Further, ongoing work in revenue cycle and cost management is expected to support steady results in fiscal 2016 and beyond, as PRMC works to retain and develop its clinical complement. Its steady leading market position in Kerr County remains a key credit strength; however, PRMC will need to continue cementing its ambulatory footprint to fend off encroachment from several larger health systems based in San Antonio.
In addition, during fiscal 2015, PRMC successfully appealed its $12 million SCH revocation penalty, which was terminated in fiscal 2012 and applied retroactively to fiscal 2008. As a result, in fiscal 2015 PRMC recorded a $12 million adjustment in non-operating income, and also recorded a $6 million receivable in due from third party payors and reversed the remaining $6 million payable to third party payors. These one-time adjustments produced a 22.5% EBITDA margin, up from 16.2% prior year.
While these one-time adjustments will not persist, PRMC has not been reliant on SCH status for supplemental reimbursement since fiscal 2012. It expects to maintain a healthy EBITDA margin near $17 million (14%) in fiscal 2016, which would produce over 3.5x debt service coverage, and support its $9.8 million in capital expenditure plans.
NEW ISSUE DEBT
With the issuance of the series 2015 bonds to refund the existing series 2005 bonds, PRMC will maintain a 100% fixed rate debt structure with no swaps. With the matched maturity refunding, PRMC's pro forma maximum annual debt service (MADS) is estimated at $4.8 million, down from $5.7 million which includes the release of the series 2005 debt service reserve fund as a source of funds. Pro forma MADS as a percent of revenue was 4% at fiscal 2015 (June 30 year-end), compared to the category median of 3.6%. Debt service is expected to be level through matched maturity in 2036.
PRMC has no additional debt plans and manageable capital plans, allowing for ongoing debt moderation going forward. Per its covenant calculations, PRMC produced 6.1x debt service coverage (based on existing MADS) and had 398 DCOH ahead of the 1.15x coverage and 70 DCOH requirements per the indenture.
PRMC will covenant to provide audited annual financial statements within 150 days of fiscal year end and quarterly disclosure within 60 days of quarter end to bondholders. Disclosure information is disseminated through the Municipal Securities Rulemaking Board's Electronic Municipal Market Access (EMMA) system.