Fitch Affirms Blanchard Valley Health System Revs at 'A'; Outlook Revised to Positive
OREANDA-NEWS. Fitch Ratings has affirmed the 'A' rating on the following Hancock County, Ohio bonds issued on behalf of Blanchard Valley Regional Medical Center (d/b/a Blanchard Valley Health System, BVHS):
--$103.4 million hospital facility revenue bonds, series 2011A.
The Rating Outlook has been revised to Positive from Stable.
The bonds are secured by a pledge of gross receipts of the obligated group, and mortgage lien.
KEY RATING DRIVERS
STRENGTHENING LIQUIDITY: The Outlook revision to Positive is supported by ongoing growth in balance sheet strength. At Dec. 31, 2015 BVHS had $285.2 million in unrestricted cash and investments, equating to 397.5 days cash on hand (DCOH), a 21.9 times (x) cushion ratio, and 199.3% cash to debt, exceeding Fitch's respective 'A' category medians of 205.3 DCOH, 18.5x cushion ratio and 143.7% cash to debt. Liquidity growth reflects BVHS strong cash flow and modest capital spending, offset by recent asset devaluation.
MODERATING DEBT BURDEN: The Outlook revision is further supported by some moderation in leverage, which is expected to continue. Debt to capitalization declined to 34.3% through 2015 and is expected to further decline as BVHS has no additional debt plans and modest capital needs. Debt service coverage has remained consistently healthy, at 4.5x in 2014 and 4.1x in 2015 by operating EBITDA, ahead of Fitch's 'A' category median of 3.5x.
ROBUST PROFITABILITY: Since 2011, BVHS has averaged a 9.4% operating margin and 17.2% operating EBITDA margin. This has been supported by healthy revenue and clinical volume growth, as well as solid expense controls. Steady performance is expected in 2016, which is consistent with the 10.5% operating and 17.3% operating EBITDA margins generated through 2015 (unaudited).
DOMINANT MARKET POSITION: BVHS maintains a stable and dominant market position within its primary service area, with 75% inpatient primary market share through June 2015. BVHS maintains a strong and collaborative relationship with local employers and payors and has benefited from strong quality results and strategic clinical service line partnerships with other providers.
LIMITED OPERATING SCALE: BVHS' limited geographic reach within Ohio and small revenue size for the 'A' rating category make it inherently more vulnerable to shifts in payor mix, clinical volumes, and physician complement. These risks are somewhat mitigated by the limited competitive activity within the service area, and BVHS' demonstrated ability to recruit and retain clinicians.
FURTHER IMPROVEMENT IN FINANCIAL PROFILE: Fitch expects leverage metrics to moderate further as Blanchard Valley Health System has no plans to issue long-term debt. Sustained operating profitability which provides further moderation in debt burden and improvement in liquidity could result in upward rating movement over the next 24 months.
BVHS is a health system based in Findlay, OH approximately 54 miles south of Toledo. BVHS maintains two acute care hospitals including a 150-bed facility in Findlay and a 25-bed facility 20 miles southwest in Bluffton, a multi-specialty medical group, retirement communities, a foundation, and several other affiliates. Total operating revenue was $308.6 million in 2015 (Dec. 31 year end, unaudited).
Fitch's analysis is based on the consolidated entity. The obligated group generates substantially all consolidated assets and revenues, save for CITAS Inc., a for profit physician recruiting entity that represents a negligible percentage of the consolidated disclosure.
ROBUST CASH FLOW
BVHS continues to produce healthy cash flow, which has been driven in large part by solid clinical volume growth as well as a leading market presence. Utilization trends were generally positive in fiscal 2014 and 2015, following a few years of inpatient declines. Of note, BVHS' affiliation with Nationwide Children's coupled with reduced competition for Obstetric services have bolstered delivery and pediatric volumes as well in the past two years. Additional capital and strategic investment in women's services at BVHS' Bluffton campus is expected to stem some outmigration to Lima to the southwest.
Healthy cash flow has supported liquidity growth as well as ongoing debt moderation. With budgeted annual capital expenditures near $20 million planned through 2018, BVHS should generate more than sufficient operating cash flow to fund capital needs as well as support further balance sheet growth. BVHS' EBITDA is expected to remain robust near $55-$60 million in 2016.
Total debt equaled approximately $143 million at fiscal 2015, including $103.4 million in fixed rate bonds and approximately $38.5 million in variable rate bank qualified notes which term in 2021. Maximum annual debt service (MADS) equals $13 million.
BVHS is also party to a $110.9 million original notional fixed-payer swap, which is insured with Assured Guaranty. The swap had a -$23 million mark-to-market as of Dec. 31, 2015. No collateral is currently required to be posted through the April 2017 insurance expiration. Beyond that, based on BVHS' current 'A' rating the collateral posting threshold would be $10 million.