Fitch Affirms Doctors Community Hospital (MD) Revs at 'BB+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the 'BB+' rating on the following revenue bonds issued by the Maryland Health and Higher Educational Facilities Authority issued on behalf of Doctors Community Hospital (DCH):
--$81,730,000 fixed rate bonds, series 2010;
--$58,090,000 fixed rate bonds, series 2007A.
The Rating Outlook is Stable.
The bonds are secured by a pledge of all receipts, a mortgage on the hospital, and a debt service reserve fund.
KEY RATING DRIVERS
POSITIVE FINANCIAL TREND: Under Maryland Global Budget (GBR) program, DCH's profitability improved substantially over the last three fiscal years. Operating margin was 2.7% in the fiscal year ended June 30, 2015 and 4.6% in the eight-month interim period ended Feb. 29, 2016. The improvement has been largely driven by a combination of the Maryland Global Budget Revenue (GBR) program and diligent expense management. The GBR program's revenue target provides a predictable revenue stream for DCH, mitigating exposure to revenue volatility often observed in smaller providers.
WEAK LIQUIDITY: Liquidity metrics remain very weak and continue to be a key credit concern. Days cash on hand of 85.1, 4.4x cushion ratio, and 34.5% cash to debt at Feb. 29, 2016 compared unfavorably against peers in the below investment grade category as well as other providers operating under Maryland GBR. However, absolute levels of cash and investments have exhibited steady growth since FYE 2013.
HIGH DEBT BURDEN: Debt burden is high with $10.9 million in annual debt service, which equated to 5.1% of 2015 revenues compared to the below investment grade median of 4.4%. Debt to EBITDA of 6.3x and debt to capitalization of 74.8% also compare unfavorably against the below investment grade medians. Debt service is level through 2038 and will likely limit liquidity growth without further improvement in cash flow.
IMPROVING DEBT SERVICE COVERAGE: Maximum annual debt service (MADS) coverage by operating EBITDA improved to 2.1x in fiscal 2015 compared to 1.7x in 2014 and 1.4x in 2013. MADS coverage increased again in the eight-month interim 2016 period to 2.5x.
LIQUIDITY GROWTH NEEDED: While DCH is expected to benefit from improved operational and financial stability under the GBR program, a return to investment grade rating will be dependent on recovery of liquidity ratios to levels consistent with the 'BBB' rating category.
DCH is a 163-licensed bed hospital located in Lanham, MD, a suburb of Washington D.C. Fitch's analysis is based on Doctors Community Hospital and Subsidiaries, which generated $213.9 million in total operating revenues in fiscal 2015. The obligated group is the hospital only and accounted for over 100% of total assets and 89% of total revenue of the entire entity in 2015.
Maryland Global Budget Revenue Program
DCH's continued financial improvement in 2015 reflects the benefit of participation in the GBR program that the State of Maryland implemented under the state's Medicare Waiver. The GBR program was introduced in 2013, offering participants a fixed revenue stream designed to reimburse hospitals for managing care in the most appropriate cost setting. The amount of hospital revenue is known before the start of the fiscal year and is adjusted annually. As the first participant, DCH began receiving a fixed revenue base beginning July 1, 2013 (fiscal 2014) based on factors including service area demographics, utilization trends, and market position. For fiscal 2017, GBR rate increase is estimated to be around 2%.
Thus far, the GBR program has yielded tangible benefits to DCH, as evidenced in the recovery in overall financial profile since its implementation. A stable revenue base has provided financial cushion while positioning the organization to meet the changing healthcare needs of the community. In fiscal 2014 and 2015, admissions declined and outpatient volume began recovering. Combined with diligent expense control, overall financial improvements have been material. Further, DCH has been actively employing physicians, facilitating revenue growth outside of GBR and expanding its clinical network.
Going forward, DCH's ability to coordinate care delivery while directing patients to the most cost-effective setting will remain essential. GBR revenues can change based on various factors including market shifts, readmissions, and population growth. DCH received bonuses in fiscal 2016 (for calendar 2014 results) but expects penalties in fiscal 2017 (for calendar 2015 results), as incremental improvements become harder to achieve.
Sustained Positive Profitability
Profitability has recovered consistently since recording a negative 1.5% operating margin in fiscal2013. Largely driven by revenue stability under GBR, the positive trend continued through fiscal 2015 and in the eight-month interim period ended Feb. 29, 2016 with operating margins of 2.7% and 4.6%, respectively, which compares well against Fitch's 'BBB' median of 0.6%. Similarly, operating EBITDA margins were 10.7% in 2015 and 11.9% in the interim period, compared to the 'BBB' median of 7.7%. Management anticipates sustaining current profitability levels in fiscal 2016, which Fitch believes is achievable.
Management reported some growth in inpatient volume in fiscal 2016, but thus far the increased demand has not negatively affected overall profitability from its fixed revenue stream. Management attributes maintenance of healthy operating margins to diligent expense management across the organization.
DCH's capital plans remain manageable for the foreseeable future. Operating room renovations are complete and were paid with remaining bond proceeds from prior issuances. Capital spending is budgeted at $5.1 million for fiscal 2017, compared to depreciation levels at around $10 million.
Unrestricted cash and investments totaled $48.2 million at Feb. 29, 2016, equating to 85 DCOH, 4.4x cushion ratio, and 34.5% cash to debt, which remains unfavorable within the 'BB' rating category and against other Maryland issuers under the all-payor rate system. While improved cash flows and manageable capital spending has reversed the trend of declining liquidity, future growth is somewhat limited by high debt service requirements of nearly $11 million annually. As a result, Fitch believes current liquidity levels provide limited cushion from operating variability despite manageable future capital needs. Further liquidity growth would be key in returning to an investment grade rating.
As of Feb. 29, 2016, long-term debt totaled $139.8 million, generating MADS of $10.9 million. Debt burden is high as measured by MADS as a percentage of revenue of 5.1% and 6.2x debt to EBITDA in fiscal 2015 compared to the below investment grade medians of 4.4% and 5.1x.
MADS coverage improved to a 2.1x in fiscal 2015 and 2.5x in the interim 2016 period, which is improved from a recent low of 1.4x in fiscal 2013. Further, MADS coverage by the obligated group, as calculated under the bond documents, was stronger at 3.3x through the six-month interim period ended Dec. 31, 2015. All debt is fixed and there are no swaps outstanding.
DCH covenants to provide quarterly financial information 45 days after quarter end and annual financial information within 120 days of fiscal year end via the Municipal Securities Rulemaking Board's EMMA system.