Fitch Affirms Marshall Medical Center (CA) Rev Bonds at 'BB+'; Outlook Revised to Positive
OREANDA-NEWS. Fitch Ratings has affirmed the 'BB+' rating on the following California Health Facilities Financing Authority bonds, issued on behalf of Marshall Medical Center (MMC):
--$20 million series 2004B auction rate (insured: Ambac Assurance Corporation).
MMC has $13.7 million fixed rate series 2012A bonds and $26.7 million fixed rate 2015A bonds that are insured by Cal-Mortgage Loan Insurance Division. The series 2012A bonds have an insured only rating of 'A+'. Fitch was not asked to rate the series 2015A bonds.
The Rating Outlook is revised to Positive from Stable.
Debt payments are secured by a pledge of the gross revenues of the obligated group and a mortgage lien. There is a debt service reserve fund. The consolidated financials include a subsidiary, a surgery center that is non-obligated. The obligated group accounted for 99.7% of total assets and 97.4% of total revenue of the consolidated entity in fiscal 2014 (Oct. 31 year end). Fitch's analysis is based on the consolidated entity.
KEY RATING DRIVERS
STRONG OPERATING PERFORMANCE: The Rating Outlook revision to Positive from Stable reflects MMC's very strong operating performance in fiscal 2015 that led to almost a doubling of its unrestricted cash and investments. An upgrade is precluded at this time given the uncertainty around both the permanence of the provider fee program that has greatly benefited MMC, and expected sizeable investments in an integrated electronic medical record.
SIGNIFICANT POSITIVE IMPACT FROM PROVIDER FEE: California enacted a hospital provider fee in 2010 to draw down additional federal funds for Medi-Cal services, and the current program expires in December 2016. While MMC has significantly benefited from the provider fee program, its profitability has been volatile over the last several years due to the timing of recording the provider fee net income related to the significant lag in receiving the various approvals from the Centers for Medicare and Medicaid Services (CMS). Fiscal 2015 performance includes a portion of provider fee funds related to fiscal 2014. Provider fee funds (net of pledge payments) totaled $6.9 million in fiscal 2013, $1.3 million in fiscal 2014 and $18.4 million in fiscal 2015.
GOOD DEBT SERVICE COVERAGE: With strong operating performance and a moderate debt burden, debt service coverage is very good for the rating level. Maximum annual debt service (MADS) coverage by EBITDA was 7.4x in fiscal 2015 compared to 3.2x in fiscal 2014 and 3.4x in fiscal 2013.
ELEVATED CAPITAL SPENDING EXPECTED: After MMC opened a three-story hospital expansion in January 2013, capital needs have been manageable. However, higher capital spending is expected over the next two years due to the MMC's plan to implement an integrated electronic medical record. This project is expected to increase both capital and operating costs over the next two years.
LIQUIDITY IMPROVEMENT: As of Oct. 31, 2015, MMC had $61.9 million of unrestricted cash and investments (114.7 days cash on hand [DCOH] and 90.8% cash to debt), compared to $33.4 million the prior year (62.2 DCOH and 47.2% cash to debt). Management has been committed to rebuilding liquidity since funding half of its expansion project from equity. The significant improvement in liquidity was driven by the receipt of the provider fee funds.
MANAGEMENT ADDRESSING REDUCED REIMBUSEMENT ENVIRONMENT: MMC has been proactive in entering into alternative payer arrangements to gain experience as the reimbursement model shifts more to value based. MMC is participating in bundled payments, an accountable care organization, and a program to manage high utilizers of medical services.
CLARITY ON PROVIDER FEE PROGRAM: Although the majority of MMC's ratios are currently in line with the 'BBB' category medians, its small revenue base subjects performance to volatility. Given the large impact of the provider fee program, upward movement of the rating will be dependent on ongoing funding after 2016.
MMC is located in Placerville, CA approximately 45 miles east of Sacramento, and operates a 113 bed general acute-care community hospital and several clinics. MMC maintains a good market position in its service area, with competition mainly from Kaiser Permanente as well as other tertiary providers in the Sacramento area. In fiscal 2015 (interim financials), MMC generated $230.6 million in total operating revenue.
Strong Profitability in Fiscal 2015
Operating income in fiscal 2015 was $21.5 million (9.3% operating margin), compared to 0.3% operating margin in fiscal 2014 and 2.6% in fiscal 2013. Fiscal 2015 performance was driven by good volume growth and $18.4 million of provider fee funds.
The provider fee program has been in place since November 2009 (retroactive to April 2009) with various phases and sunset dates; the most recent phase (Phase 4) is running from Jan. 1, 2014 to Dec. 31, 2016. The funding from this program has been uneven given the timing of CMS approval. The fee for service portion of the Phase 4 program did not receive approval until December 2014. Therefore, the amounts related to calendar year 2014 were not booked until December 2014. MMC is not subject to the provider fee portion of the provider fee program due to its rural designation, but does make pledge payments, which are fairly minimal (less than $300,000).
The financial benefit from the provider fee program has been $12.8 million in fiscal 2012, $6.9 million in fiscal 2013, $1.3 million in fiscal 2014, $18.4 million in fiscal 2015 and a projected $12 million in fiscal 2016. A November 2016 ballot initiative seeks to make the program permanent. If approved, management estimates the program would result in annual funding of $10 million-$13 million.
Conservative Debt Profile
Total par amount of debt outstanding as of Oct. 31, 2015 was $63.4 million and includes $26.9 million series 2015A fixed rate, $20 million series 2004B auction rate, $13.7 million series 2012A fixed rate and $2.8 million USDA loan and capital leases. All of the bonds are insured by Cal Mortgage, and MMC issued the series 2015A bonds to refinance the series 2004A bonds. Management stated that the auction rate bonds have been setting at less than 1%. MADS is calculated at $5.1 million, down from $5.8 million during last year's review. The debt burden is moderate and MADS accounted for 2.2% of total revenue in fiscal 2015, compared to the 'BBB' category of 3.6%.